Evening Market Update

US Equities in the Green Despite Dismal Domestic Data

Stocks managed to overcome a flood of weak economic data to finish modestly higher, as another drop in jobless claims and substantial buzz around the IPO of social networking firm LinkedIn helped keep the markets above the flatline. The early concerns emerged on reports of an unexpected decline in existing home sales, a sharp drop in the Philly Fed Manufacturing Index, and the biggest decline in the Index of Leading Economic Indicators since March of 2009, which helped Treasuries pare early losses and move higher. The equity front also did little to boost sentiment, as Sears Holdings and Advance Auto Parts both missed the Street’s profit forecast, Limited Brands beat EPS estimates but issued a disappointing 2Q outlook, while PetSmart beat on the bottom-line and raised its full-year guidance. In M&A news, the Wall Street Journal is reporting that Big Lots has decided not to sell itself, Thermo Fisher Scientific agreed to acquire allergy and autoimmunity diagnostics company Phadia for about $3.5 billion, and Blackrock announced that it will buy back Dow member Bank of America’s stake in the money manager for $2.55 billion.

The Dow Jones Industrial Average rose 45 points (0.4%) to 12,605, the S&P 500 Index increased 3 points (0.2%) to 1,344, and the Nasdaq Composite advanced 8 points (0.3%) to 2,823. In moderately light volume, 823 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil closed $1.55 lower at $98.55 per barrel, wholesale gasoline fell $0.04 to $2.93 per gallon, while the Bloomberg gold spot price decreased $2.43 to $1,494.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.3% to 75.09.

Limited Brands Inc. (LTD $41) reported adjusted 1Q earnings of $0.40 per share, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 15% year-over-year (y/y) to $2.2 billion, roughly inline with the Street’s forecast. The retailer said 1Q same-store sales—sales at stores open at least a year—jumped 15% y/y. The ranges of LTD’s 2Q and full-year EPS had midpoints that were below analysts’ expectations. Shares were lower.

Sears Holdings Corp. (SHLD $74) reported a 1Q net loss ex-items of $1.39 per share, compared to the shortfall of $1.22 that analysts had expected, but although revenues fell 3% y/y to $9.7 billion, the figure topped the $9.6 billion that the Street was forecasting. SHLD said its US same-store sales fell 3.6% y/y, driven by declines in appliances, which benefitted in the prior year from the government’s cash for appliances rebate program, as well as apparel—due to bad weather—and consumer electronics. SHLD traded solidly to the downside.

Advance Auto Parts Inc. (AAP $63) announced 1Q EPS of $1.35, three cents below the Street’s forecast, with revenues increasing 4% y/y to $1.9 billion, mostly matching analysts’ expectations, with same-store sales rising 1.4% y/y. The auto parts retailer said 1Q was “challenging” as improved merchandising, pricing, and parts availability were partially offset by increased supply chain costs. The company reaffirmed it full-year EPS outlook. Shares finished sharply lower.

PetSmart Inc. (PETM $46) achieved 1Q profits of $0.61 per share, above the $0.55 that the Street had anticipated, as revenues rose 7% y/y to $1.5 billion, inline with analysts’ forecasts, while same-store sales increased 5% y/y. The pet retailer said it benefitted from transaction growth of 2.7% y/y and a 9% increase in services sales. PETM raised its full-year EPS outlook, and shares moved nicely higher

Big Lots Inc. (BIG $34) finished lower after the Wall Street Journal reported that the company has decided not to sell itself as takeover offers from private equity firms were below its expectations, according to people familiar with the matter. BIG has not commented on the report.

In other M&A news, Thermo Fisher Scientific Inc. (TMO $65) traded higher after the company announced that it has agreed to acquire allergy and autoimmunity diagnostics company Phadia from European private-equity firm Cinven for about 2.47 billion euros ($3.5 billion). Moreover, Blackrock Inc. (BLK $198) announced that it will buy back Dow member Bank of America Corp’s (BAC $12 1) stake in the money manager for $2.55 billion. BLK finished higher, while BAC was lower.

Finally, social network firm LinkedIn Corp. (LNKD $94) began trading on the NYSE, with shares more than doubling in the first hours of trading and closing sharply higher, after the company sold 7.84 million shares of stock at the high end of its expected $42 to $45 IPO range.

Jobless claims fall, but all other domestic economic data disappoints 

Weekly initial jobless claims dropped by 29,000 to 409,000, versus last week's figure which was upwardly revised by 4,000 to 438,000, and compared the decline to 420,000 that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, increased by 1,250 to 439,000, while continuing claims dropped by 81,000 to 3,711,000, below the forecast of economists, which called for continuing claims to come in at 3,728,000.

However, existing home sales unexpectedly declined, slipping 0.8% month-over-month (m/m) in April to an annual rate of 5.05 million units, compared to the increase to 5.2 million units forecasted by economists, and March’s figure was downwardly revised slightly to 5.09 million units. The median existing-home price fell 5.0% from a year ago to $163,700, but rose 2.6% m/m. The supply of homes rose by 9.9% m/m to 3.87 million units, equating to 9.2 months of supply at the current sales pace, amid the spring selling season. Single-family home sales dipped 0.5% m/m, and multi-family declined 3.1%. First-time buyers accounted for 36% of sales in April, up from 33% in March, while investors declined from 22% of the total to 20%. Also, distressed home sales—home that are usually sold at a discount of about 20%, per the National Association of Realtors—accounted for 37% of sales, down from 40% in March. Sales of existing homes reflect closings from contracts entered one to two months earlier.

Moreover, the Philly Fed Manufacturing Index fell sharply to surprise economists, dropping from 18.5 in April to 3.9 in May. Economists had expected the index to increase to 20.0, and although the report continued to depict expansion in business activity as denoted by a reading above zero, the index fell to the slowest pace since October 2010. The index dropped as new orders fell 13.4 points to 5.4, shipments tumbled 22.6 points to 6.5 and inventories fall into negative territory. However, employment rose 9.8 points to 22.1 and prices paid declined by 8.8 points to 48.3.

Finally, the Conference Board’s Index of Leading Economic Indicators (LEI) for April unexpectedly declined, falling 0.3% m/m—the biggest decline since March 2009—compared to the 0.1% rise that economists expected, following an upwardly revised 0.7% gain in March. This snaps a streak of nine-straight monthly advances for the index, which fell because the jobless claims, average workweek, and building permits components all moved into negative territory, offsetting modest improvements in pace of deliveries and a favorable yield curve.

Today’s heavy dose of data disappointed the markets, but the employment figures in the reports could be seen as somewhat of a silver lining. Jobless claims, which was affected recently by several special factors and weighed on the LEI, appear to be threatening a move back below the 400,000 mark, while the employment component of the Philly Fed report was the second-strongest portion of the index—behind prices paid, which pulled back solidly. Moreover, although the housing sector appears to be nowhere near a recovery, its impact on the overall sector is declining and if we get some traction in employment it will likely help resuscitate the struggling sector.

Treasuries pared early declines following the data to finish mostly higher, as the yield on the 2-year note was 3 bps lower at 0.52%, the yield on the 10-year note lost 1 bp to 3.17%, while the 30-year bond yield was unchanged at 4.30%.

UK retail sales up, Japan’s 1Q GDP below expectations

Economic news out of Europe helped improve sentiment, as a report showed UK retail sales rose more than economists forecasted for April, more than offsetting a separate report that showed the nation’s consumer confidence unexpectedly declined in April. In other news, Dominique Strauss-Kahn resigned as the head of the International Monetary Fund (IMF) following his arrest over the weekend on charges of attempted rape. Strauss-Kahn was also considered to be the leading candidate for the presidency of France and he denied the charges against him.

Asia/Pacific economic news was highlighted by the release of Japan’s 1Q GDP report, which showed the economy contracted by 0.9% quarter-over-quarter (q/q), compared to the 0.5% decline that economists expected as output was stalled by the March earthquake and tsunami. The 1Q drop in GDP followed a downwardly revised 0.8% contraction for 4Q, meeting the technical definition of a recession by posting two-consecutive quarters of GDP declines. Separate economic reports out of Japan showed March industrial production was revised to a larger drop than initially projected, and department store sales for April declined. Meanwhile, there were other GDP reports released today, as Singapore’s 1Q GDP was revised lower to a 22.5% q/q rate of expansion, from a preliminary report of 23.5% growth, and compared to the downward revision to 22.0% that economists expected. The nation raised its 2011 growth outlook following the release and the FTSE Straits Times Index increased 1.0%. Also, Taiwan’s 1Q GDP was revised higher to a 6.55% y/y expansion, from 6.19%, and compared to the 6.20% that was anticipated.

After the flood of domestic economic data released today, there will be no reports on the US economic calendar tomorrow. The international economic calendar will yield German producer prices, euro-zone consumer confidence, Canadian retail sales and CPI, and Brazilian CPI. Additionally, the Bank of Japan will conclude its two-day monetary policy meeting, with expectations that it will keep its benchmark interest rate near zero and refrain from increasing its credit programs.