Evening Market Update

Gains Erased in the Final Minutes

Despite a stronger-than-forecasted August retail sales report, a better-than-expected rise in business inventories and small business confidence increasing for the first time since May, stocks weren’t able to continue the upward momentum, falling in the final minutes of trading to finish mixed. On the equity front, Dow member Cisco Systems said that it plans to pay a dividend, Best Buy Co. reported better-than-expected earnings, and Kroger bested the Street’s earnings and revenue forecasts. Elsewhere, the Wall Street Journal reported that AIG is in talks to make an early exit from under the US government’s umbrella, and Nokia announced that its Chairman will step down in 2012. Treasuries finished higher.

The Dow Jones Industrial Average lost 18 points (0.2%) to close at 10,526, the S&P 500 Index edged 1 point (0.1%) lower to 1,121, while the Nasdaq Composite advanced 4 points (0.2%) to 2,290. In moderate volume, 923 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil fell $0.39 to $76.80 per barrel, wholesale gasoline shed $0.01 to $1.97 per gallon, and the Bloomberg gold spot price jumped $22.95 to $1,268.55, after briefly touching an all-time high intraday. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.9% at 81.13.

Best Buy Co. Inc. (BBY $37) reported 2Q EPS of $0.60, well above the $0.44 Reuters estimate, but revenues, which rose 2.9% year-over-year (y/y) to $11.3 billion, came in shy of the $11.5 billion that analysts were looking for. Same-store sales—sales at stores open at least 14 full months—at the electronics retailer dipped 0.1% during the quarter, but the company said it “significantly” increased its operating margin in 2Q. Domestic same-store sales declined by 1%, driven primarily by a decline in customer traffic, partially offset by an increase in average ticket price. Meanwhile, BBY said its international segment posted a 4% increase in same-store sales with smart-phone demand supporting Europe, while growth in consumer spending and government stimulus programs helped lead a 20% jump in same-store sales in China. Also, BBY increased its fiscal 2011 EPS guidance. Shares were solidly higher.

Dow member Cisco Systems Inc. (CSCO $21) was higher after the world’s largest maker of networking equipment said at its annual analyst conference that it plans to initiate the company’s first dividend this fiscal year. According to Bloomberg, the company’s presentation noted that the “current thinking” is for a possible dividend of 1-2%.

The Wall Street Journal reported that government-controlled American International Group Inc. (AIG $36) is in talks with government officials to speed up it exit plan from the Treasury Department, which could commence as early as the first half of 2011, and repay US taxpayers in full, according to people familiar with the matter. The reports notes that some estimated it would take another two to three years for the process to start. AIG did not comment on the report. AIG was lower.

Kroger Co. (KR $21) announced 2Q EPS of $0.41, compared to the $0.36 that analysts were expecting, with revenues—including fuel—increasing 6.0% y/y to $18.8 billion, just above the $18.7 billion that the Street was anticipating. The supermarket company said its sales have remained “solid” in the face of competitive and economic challenges. KR reaffirmed its full-year EPS outlook. Shares were higher.

Nokia (NOK $10) announced that Chairman Jorma Ollila will step down from his post in 2012, a spokesperson for the company said. The announcement comes days after the world’s largest handset maker named a former Microsoft (MSFT $25) executive as its new CEO, and on the same day that NOK unveiled the newest additions to its line of smartphones. Ollila has been credited in many circles as being integral in lifting the Finnish company to the number one spot in the cellphone space. Shares of NOK were lower.

Retail sales gain more than expected, small business optimism improves

Advance retail sales for August rose 0.4% month-over-month (m/m), compared to the Bloomberg forecast of economists that called for an increase of 0.3%, and July’s 0.4% gain was revised modestly to a 0.3% advance. August sales ex-autos gained 0.6%, well above the expectation of a 0.3% increase, but July’s 0.2% rise was revised to a 0.1% advance. Sales ex-autos and gas rose 0.5% in August, versus the 0.4% increase that was anticipated, and its July figure was left unrevised at a 0.1% decline.

As foreshadowed by several major retailers in their August same-store sales reports earlier this month, back-to-school shopping boosted sales during the month, with the US Census Bureau’s report showing clothing sales rose 1.2% over July. Also, the report revealed that sales of gasoline, food and beverage, and sporting goods, hobby, book & music stores commanded the bulk of the spending outlays by consumers. However, sales of electronics and appliances, motor vehicles, and furniture were all down in August versus July. Interestingly, online and mail order sales rose 0.6% m/m in August and were up over 10% y/y, suggesting technology continues to change the way some consumers do business. Even though the report came in better than expected on both a headline level and after stripping out various components, some discounted the data as consumers continue to sock away income at a relatively abnormally-high rate as they face a plethora of headwinds, such as: high unemployment, stock market volatility, ravaged net worth, and the emergence of deflationary concerns. Upcoming retail sales reports, after the impact of the start to school dissipates, may carry more weight as the industry heads toward the crucial holiday shopping season. However, today’s data did show that compared to the same period last year, sales were up 3.6%, possibly suggesting the consumer, which is vital to economic prosperity, is gaining some confidence to loosen the purse strings somewhat.

Meanwhile, business inventories rose 1.0% m/m in July, above the 0.7% increase that was expected, and June’s 0.3% increase was revised to a 0.5% gain. Sales rose 0.7% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at 1.26.

In other economic news, the NFIB Small Business Optimism Index posted the first increase since May, rising from 88.1 in July to 88.8 in August, but the expectation of economists called for the index to improve to 89.0. The increase came as the number of firms reporting expectations of a better economy improved, along with those expecting the higher sales and selling prices, while firms’ plans to hire remained weak.

Treasuries were higher on the day and yields came off of their highs for the month that accompanied the uncharacteristically strong performance in the equity markets thus far in September. The yield on the two-year note lost 4 bps to 0.50%, the yield on the 10-year note declined 9 bps to 2.67%, and the 30-year bond yield fell 6 bps to 3.79.

German confidence plummets, Japan’s Kan victorious

The ZEW Survey of Economic Sentiment in Germany—Europe’s largest economy—fell much more than anticipated, dropping from 14 in August to -4.3 for September, versus the decrease to 10 that economists had expected, the fifth monthly decline and the lowest level in 19 months. ZEW indicated that while languishing industrial production and a fall in incoming orders may only be indicative of a temporary slowdown, it could hint at a flattening of economic activity. In other economic news across the pond, UK home prices declined more than expected, and euro-zone industrial production unexpectedly came in flat m/m for July, compared to the 0.1% growth that was anticipated, and the y/y change showed production grew at a smaller pace than forecasted. Meanwhile on the positive side of the economic ledger, a report on UK consumer confidence improved by a larger amount than forecasted. Inflation data was plentiful across the pond, with consumer prices in the UK and German wholesale prices both coming in hotter than anticipated, while France’s consumer prices were cooler than forecasted.

In political news in Asia/Pacific, Japanese Prime Minister Kan was re-elected as head of the Democratic Party of Japan, easily defeating a party rival, in an election that showed Kan received just over half the votes. After the vote, Kan pledged that Japan “will overcome the past 20 years of deflation, create a strong economy, and revive employment.” Kan has the difficult task of trying to cut down on the debt levels of the Japanese government and attempting to ensure that the yen’s recent surge—which continues to trade near a fifteen-year high versus the dollar—does not further hamstring the Japanese economy. In Japanese economic news, the final read on the nation’s industrial production for July came in at a decline of 0.2% m/m, compared to the 0.3% gain that was initially forecasted.

In other economic reports in the region, Australia’s business confidence improved, while a read on business conditions down under remained unchanged, and New Zealand’s retail sales unexpectedly declined, while the US Conference Board’s Leading Economic Index for China improved from 146.9 in June to 147.6 for July.

Manufacturing read set for tomorrow

Tomorrow, the US economic calendar will tilt toward the manufacturing side of the ledger, with the releases of the Empire Manufacturing Index, expected to rebound somewhat from its disappointing drop to 7.10 in August to 8.00 in September—with a reading above zero denoting expansion—and the industrial production and capacity utilization report. Industrial production was a pleasant surprise for the bulls last month after posting a strong 1.0% rate of growth for July and is forecasted to increase 0.2% for August. Meanwhile, capacity utilization is expected to improve from 74.8% in July to 75.0% in August, but about 5.6 percentage points below its average since 1972, contributing to the “substantial resource slack,” which has kept the Federal Reserve’s outlook on inflation stable, allowing it to focus on the other side of its dual mandate of promoting full employment and keep its extremely loose monetary policy intact for an “extended period.”

Also gracing the US economic calendar will be the MBA Mortgage Applications Index, and the Import Price Index, forecast to rise 0.3% during August following a 0.2% gain in July.

Internationally, Italy and the euro-zone will release their respective CPIs, the UK will provide employment figures, and Canada will report manufacturing numbers.