Evening Update

Stocks Net Modest Gains Despite Weak Retail Sales

Traders digested conflicting data today, as an unexpected decline in retail sales for December and a larger-than-expected jump in weekly initial unemployment claims were offset by a positive reading on business inventories and a favorable revision to the November retail sales figure. Treasuries were higher on the release of this data and a strong 30-year bond auction. On the equity front, Intel reported better-than-expected earnings after the close, while Target announced that it is resuming its share repurchase program and Williams-Sonoma raised its 4Q guidance on the heels of a strong holiday performance and Forest Oil announced positive results for its Granite Wash wells. In other equity news, Eastman Kodak unveiled a lawsuit against Apple and Research in Motion over an alleged technology infringement and President Barack Obama proposed a “Financial Crisis Responsibility Fee” in an attempt to recoup TARP funds.

The Dow Jones Industrial Average rose 30 points (0.3%) to close at 10,711, while the S&P 500 Index added 3 points (0.2%) to 1,148, and the Nasdaq Composite rose 9 points (0.4%) to 2,317. In moderately light volume, 888 million shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $0.40 to $79.25 per barrel, wholesale gasoline lost $0.01 to $2.07 per gallon, while the Bloomberg gold spot price rose $5.08 to $1,143.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.1% to 76.76.

After the close, Dow member Intel (INTC $21) reported earnings of $0.40 per share and revenue of $10.6 billion, compared to analysts’ estimates of $0.30 per share and revenue of $10.2 billion.

Target (TGT $50) announced that it is resuming its open-market purchases of its shares under the $10 billion program authorized by its Board of Directors in November 2007, which was suspended in 2008. TGT said better results in both its retail and credit card segments, together with disciplined management of its capital expenditures and significant reductions in credit card receivables, have contributed to much stronger-than-expected cash flow generation. TGT added that the pace of repurchase activity will continue to depend on many factors, including strength in its business operations, adequate liquidity and conditions in the debt and equity markets. The company said based on current conditions and its outlook for a modestly improving economic environment, it expects the remainder of this repurchase program to be completed within two to three years. Shares were higher.

Williams-Sonoma (WSM $22) increased its 4Q guidance as it now sees revenues to come in at a range of $1.06-1.08 billion, and EPS ex-items for the quarter to be between $0.69-0.74. The home products retailer said net revenues for the 8-week holiday shopping period ended December 27th, increased by 7.4% to $783 million versus the same period last year, including same-store sales—sales at stores open at least a year—rising 6.5%. WSM said it is “extremely pleased with our holiday performance,” as revenues, selling margins, and controllable expenses all exceeded the high end of its expectations. The company also said it expects full-year EPS ex-items to be between $0.76-0.81. Analysts are expecting the company to post 4Q revenue of $1.03 billion and EPS of $0.50, while full-year EPS are expected to be $0.58. Despite the report, shares finished lower.

Eastman Kodak (EK $5) announced that it has filed lawsuits with the US International Trade Commission (ITC) against Apple (AAPL $210) and Research in Motion (RIMM $67), alleging infringement on EK’s digital imaging technology. The complaint specifically claims that AAPL’s iPhones and RIMM’s camera-enabled BlackBerry devices infringe an EK patent that covers technology related to a method for previewing images. Separately, EK filed two suits today against AAPL that claim the infringement of patents related to digital cameras and certain computer processes. AAPL and RIMM have not commented on the matter. Shares of EK and RIMM were higher, while AAPL was lower.

Shares of Forest Oil (FST $28) ended the day higher after the U.S. oil and gas producer announced results from its horizontal Texas panhandle Granite Wash wells. Each well produced 37 million cubic feet of gas equivalent per day and the company said the wells “continue to exceed our expectations, not only from the extremely high gas rates, but also the strong liquid components associated with these wells.”

Banking stocks were in focus after President Barack Obama unveiled his plan for a new tax on large financial firms, which was dubbed the “Financial Crisis Responsibility Fee,” aimed at recouping taxpayer funds from the Treasury’s Troubled Asset Relief Program (TARP), which were used to bailout the banking and auto industries. The fee, which excludes small banks and automakers, would take effect June 30 and last at least 10 years—if approved by Congress—and would apply to financial companies with assets greater than $50 billion. The proposed fee is expected to raise $90 billion over the next 10 years and $117 billion over about 12 years.

Retail sales unexpectedly fell and jobless claims rose

Advance retail sales(chart) for December fell 0.3%, compared to the Bloomberg forecast of an increase of 0.5%, while November’s 1.3% advance was revised to a 1.8% gain. Sales ex-autos declined 0.2%, versus the expectation of an increase of 0.3%. Excluding autos, gasoline and building materials, the figure the government uses to calculate the consumer spending component of GDP, sales decreased 0.3%.

Although we may never see the same pre-crisis propensity of individuals to consume as increasing household saving was a byproduct of the downturn, today’s report was disappointing as it indicated that consumers remain hesitant amid the backdrop of high unemployment and substantially deteriorated net worth. Also, expectations were favorable going into the report as indicators leading up to the release suggested strength in the final month of December, with many retailers reporting mostly better-than-expected same-store sales last week. However, there were some positive aspects of the report that should soothe some of the sting of the unexpected drop, beginning with the solid upward revision to November’s already relatively strong advance, which suggested earlier holiday sales promotions may have attracted a larger portion of the holiday shopping season. Moreover, signs that consumer spending improved versus last year were evident in the report as total sales from the three-month period of October-December—probably the most critical period for the retail sector—were up almost 2% compared to the same period last year. Additionally, December 2009 sales were 5.4% higher than December 2008. It is important to remember that the report is the first compilation of the data for the month and more data will be received by the US Department of Commerce, which will result in revisions. Also, these figures are seasonally adjusted and could distort the data, especially during the holiday period.

November business inventories rose more than expected, increasing 0.4%, compared to the forecast of a 0.3% gain, and October’s advance was revised to a slightly higher gain of 0.4% from the previously reported 0.2% rise. Sales advanced 2.0%, following October’s strong advance, to the highest level since November 2008, 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 1.30 months in October to 1.28 months in November.

Weekly initial jobless claims(chart) increased by 11,000 to 444,000, versus last week's figure which was revised slightly lower to 433,000, and compared to the consensus, which called for claims to increase to 437,000. However, trends in other components of the report continued to improve, with the four-week moving average, considered a smoother look at the trend in claims, falling to 440,750 from 449,750—the lowest level since August 2008—and continuing claims tumbling by 211,000 to 4,596,000, compared to the 4,750,000 forecast.

Meanwhile, the Import Price Index (chart) was flat month-over-month (m/m) for December, matching the expectation of economists. Year-over-year, import prices are higher by 8.6%, also matching forecasts. Petroleum imports declined 2.0% in December, and excluding petroleum, import prices increased, rising 0.5% in December.

Treasuries finished higher after the plethora of retail, employment, trade, and inventory data, as the yield on the 2-year note fell 5 bps to 0.91%, the yield on the 10-year note lost 7 bps at 3.73%, and the yield on the 30-year bond declined 10 bps to 4.61%.

ECB leaves rates unchanged while Greek concerns continue

The European Central Bank left its benchmark interest rate unchanged at 1.00%, as expected by economists surveyed by Bloomberg. In a press conference following the announcement, ECB President Jean-Claude Trichet reiterated that the current level of rates remains appropriate, while adding that, “The Governing Council expects the euro area economy to expand at a moderate pace in 2010, recognizing that the recovery process is likely to be uneven and that the outlook remains subject to uncertainty.” Trichet also provided some tough commentary toward Greece—which had its sovereign debt rating cut by all three major ratings agencies, sparking concern about the impact on the euro area countries with exposure to the nation’s debt. Trichet said, “We will not change our collateral framework for the sake of any particular country.” German Chancellor Angela Merkel also commented on the Greece situation, saying that the country’s mounting budget deficit will cause the euro to face a “very difficult phase over the coming years” and questioned who or what will push the Greek parliament into acting. In response, the Greek Prime Minister announced a plan to be presented to the European Commission tomorrow that will cut spending and raise revenue by approximately 10 billion euros

In other economic news, Eurozone industrial production increased 1.0% m/m in November, doubling the forecast of economists, and the final revision of German consumer prices rose 0.8% m/m in December, versus the forecast for prices to remain at the previous reading, which was a gain of 0.7

Consumer inflation and industrial production releases on tap

Tomorrow the Consumer Price Index (CPI) will be released, anticipated to have risen 0.2% month-over-month (m/m) in December, after rising 0.4% in November. While food and energy are the smallest components of the price basket, they are the most volatile and often account for the majority of the change in the headline rate. Ex-food and energy, the core CPI rate is forecasted to have risen 0.1% m/m, after being flat in November. On a year-over-year basis, the headline rate is expected to be up 2.8%, and ex-food and energy, the core CPI is forecasted to have increased 1.8%.

Also due out tomorrow will be the release of industrial production and capacity utilization, forecast to rise 0.6% and improve to 71.8%, respectively, for the month of December, after posting a better-than-expected increase of 0.8% in November, to a 71.3% utilization rate.

Year-over-year the CPI headline rate has lapsed comparisons to the $140 per barrel level of crude from mid-2008, and while we may see several months of increases in CPI, core inflation remains contained. High levels of slack in the economy, as illustrated by the low rate of factory utilization, as well as excess available workers and housing will likely keep inflation subdued near-term. Investors have clamored into bonds; not surprising given low yields on cash. Despite the massive issuance of government debt over the past year, yields on Treasuries remain low due to increased savings rates, and with little net new debt in the private sector, inflows of capital into fixed income have been funneled into Treasuries. However, from such a low yield currently, Liz Ann says the likelihood of continued Treasury outperformance versus stocks is greatly diminished. She notes that prior 20-year rolling periods where stocks have most severely underperformed bonds, the subsequent five-year return greatly favored stocks over bonds.

Other US economic releases on tomorrow’s calendar include the January Empire Manufacturing Index, expected to rise to 12.00 after a disappointing decrease to 2.55 in the prior month, and the preliminary University of Michigan Consumer Sentiment report is anticipated show an improvement in January to 74.0 from 72.5.

On the international front, tomorrow’s reports include CPI and the trade balance in the Eurozone, wholesale inflation in Germany, as well as the IGP-M Index in Brazil, the broadest measure of prices in the Latin American nation, which includes wholesale, consumer and construction prices.