Evening Market Update

Make It 9 of 10…Dow Sheds 500

The Dow finished lower for the ninth time in the past ten sessions as lower-than-expected initial jobless claims could not impede the massive flight to safety that severely pressured equity markets today. Fear on the Street was palpable with the Volatility Index (VIX), commonly called the fear index, hitting a high for 2011, while Treasury yields hit record lows and the major averages suffered their biggest single-day declines in over a year. In a day with few bright spots, earnings reports from Kraft, GM, CVS, and DIRECTV all met or exceeded analyst expectations and same-store sales reports from the nations’ retailers were generally stronger than expected.

The Dow Jones Industrial Average lost 513 points (4.3%) to 11,384, the S&P 500 Index fell 60 points (4.8%) to 1,200, and the Nasdaq Composite shed 137 points (5.1%) to 2,556. In heavy volume, 1.8 billion shares were traded on the NYSE and 3.2 billion shares changed hands on the Nasdaq. WTI crude oil fell $5.48 to $86.45 per barrel, wholesale gasoline dropped $0.19 to $2.74 per gallon, and the Bloomberg gold spot price retreated $10.84 to $1,650.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.7% higher at 75.16.

Dow member  Kraft Foods Inc. (KFT $34) announced 2Q earnings ex-items of $0.62 per share, above the $0.58 consensus estimate of analysts surveyed by Reuters, with revenues increasing 13.3% year-over-year (y/y) to $13.9 billion, versus the $13.15 billion that the Street had forecasted. The food company also raised its full-year guidance to at least $2.25 per share, up from $2.20 per share. Additionally, KFT announced that it would split into two separate publically-traded companies: a global snacks business and a North American grocery business. The company is looking to complete the process by the end of 2012, and will do so by spinning off the grocery business to its shareholders. Shares of Kraft were lower.

General Motors Co. (GM $26) reported 2Q EPS ex-items of $1.54, well above the $1.20 Street forecast, with revenues increasing 19% year-over-year (y/y) to $39.4billion, versus the $36.7 billion that analysts were looking for. The automaker attributed the solid quarter to stronger global sales and an increase in production of high-margin pickup trucks and SUVs in North America. GM said it expects profits in the second half of the year to be “modestly lower” than the first half, after earlier this week projecting that total industry sales for the year would be “in the low end” of previous projections. GM shares finished lower.

CVS Caremark Corp. (CVS $34) announced 2Q adjusted earnings of $0.65 per share, inline with the Street’s forecast, with revenues jumping 11% y/y to $26.6 billion, roughly matching analysts’ expectations. The hybrid pharmacy retailer and benefit manager said sales in its pharmacy services segment rose 23.2% y/y, while revenue from its retail pharmacy segment increased 3.6% y/y. The company raised the low end of its full-year EPS outlook, citing continued confidence in the remainder of the year and incremental start-up costs from its new drug management business. Shares of CVS closed on the downside.

DIRECTV (DTV $47) announced 2Q earnings of $0.91 per share, versus the $0.85 that was estimated by analysts, as revenues grew 13% y/y to $6.6 billion, compared to the $6.54 billion that the Street expected. The company saw a solid jump in subscribers in the U.S. and Latin America, while revenue per subscriber grew 3% y/y. DTV finished solidly lower.

Elsewhere, the nation’s retailers are reporting July same-store sales results—sales at stores open at least a year—headlined by Target Corp. (TGT $48), which announced a 4.1% increase y/y, compared to the 3.7% gain that analysts surveyed by Reuters had anticipated. TGT said back-to-school sales “are off to a solid start” and added that the company is well positioned heading into the 2011 holiday season. Despite the positive report TGT finished lower.  Costco Wholesale Corp. (COST $77) posted 10.0% y/y growth in July same-store sales, including inflation in gasoline prices and strengthening foreign currencies, above the 8.6% increase that was anticipated. Excluding the impact of fuel inflation and currency fluctuations, sales were 5.0% higher. However, today’s broad-based selloff sent shares of Costco lower.

Department store chain  Macy’s Inc. (M $26) achieved 5.0% y/y growth in same-store sales for July, versus the 4.1% increase that analysts had anticipated, while J.C. Penny Co. Inc. (JCP $29) posted a 3.3% y/y increase in sales, beating the gain of 2.3% that analysts projected, while Kohl’s Corp. (KSS $48) posted a surprising 4.6% decline in sales, versus the 3.4% rise that the Street expected. Meanwhile, inside the mall, Gap Inc. (GPS $17) reported a 5% y/y decline in sales, compared to the 0.7% decline that was expected. Shares of all four retailers finished lower.

Initial jobless claims little changed

Weekly initial jobless claims dropped by 1,000 to 400,000, versus last week's figure which was upwardly revised by 3,000 to 401,000, and compared to the 405,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, dropped by 6,750 to 407,750, while continuing claims increased by 10,000 to 3,730,000, above the forecast of economists, which called for continuing claims to come in at 3,700,000.

Treasuries closed higher, with the yield on the 2-year note down 7 bps at 0.27%, the yield on the 10-year note 20 bps lower at 2.42%, and the 30-year bond rate dropped 22 bps to 3.69%.

Central banks dominate headlines overseas

In Europe the focus was on monetary policy meetings of the European Central Bank (ECB) and the Bank of England (BoE). The BoE kept its key interest rate at a record low of 0.5%, as economists expected, and also maintained its current monetary easing level at 200 billion pounds. Despite the U.K. inflation remaining over double the target rate, the likelihood of a rate increase significantly dropped last week after the UK reported a 0.2% growth in 2Q GDP, which was lower than expectations and below the 0.5% rate reported in 1Q. Meanwhile, the ECB also maintained its target rate at 1.50%, after raising its key interest rate by 25 basis points at the last policy meeting. In the customary press conference that followed the ECB’s announcement, President Jean-Claude Trichet announced a six-month operation to inject liquidity into the markets, while bringing to life a bond-buying program that seemed to be dormant for the past four months. The ECB immediately began buying Portuguese and Irish bonds, as concerns about the eurozone debt crisis have grown in recent days and have caused yields in Spanish and Italian debt to hit all-time highs. Trichet refused to comment on why the ECB is only buying Portuguese and Irish bonds, and not Italian and Spanish bonds, but did say the program is ongoing and will remain transparent. Meanwhile, Trichet left the door open for further interest rate hikes later this year, saying the bank will “continue to monitor very closely all developments with respect to upside risks to price stability.” The only other economic release from across the pond was a larger-than-expected increase in German factory orders.

Devoid of any major economic releases, the big news out of Asia was the Bank of Japan’s intervention in the currency market to devalue the yen. The Japanese government sold one trillion yen ($12.5 billion), while the Bank of Japan (BoJ) loosened its monetary reins by increasing funds available for purchasing financial assets from 10 trillion yen to 15 trillion yen. The BoJ cut short its scheduled two-day monetary policy meeting to announce the decision, and also voted to leave its benchmark interest rate at its current 0%-0.1% level. The intervention dropped the yen to a three-week low against the US dollar, and follows a similar move by the Swiss government yesterday.

Expectations low heading into tomorrow’s labor report

A week of disappointing data, from slow GDP growth to an unexpected decline in personal spending in June, has damaged investor confidence and expectations for tomorrow’s labor report are likely low. Nonfarm payrolls is expected to show growth of 85,000 in July after increasing a mere 18,000 in June, while excluding government hiring, private sector payrolls are expected to increase 100,000, after expanding by 57,000 in June. Additionally, the consensus forecast by a Bloomberg survey of economists is that the unemployment rate remains at 9.2%.

The other report on the US economic calendar tomorrow is consumer credit, forecast to grow $5.0 billion in June following a $5.1 billion increase in May. International releases scheduled for tomorrow include Japan’s leading index, the French trade balance, UK homes prices and PPI, Italian 2Q GDP, German industrial production, and the Canadian employment report.