Evening Market Update

Financials Fall While Technology Rises   

Equity markets were mixed with a disappointing earnings report from Dow member JP Morgan Chase & Co taking down financials, while technology shares gained on the day ahead of an earnings beat by Google after the close. In international news, China reported weaker-than-expected exports but moved to ease credit for small businesses, while politics heated up in Italy, and the eurozone bailout fund received approval from Slovakia. Jobless claims and the US trade deficit were roughly inline with estimates, while Treasuries rose. In other equity news, Research In Motion apologized for its service outage, Safeway offered cautious commentary on the consumer, while Mead Johnson Nutrition attributed emerging market strength for demand of its products.

The Dow Jones Industrial Average fell 40 points (0.4%) to 11,478 and the S&P 500 Index lost 4 points (0.3%) to 1,204, while the Nasdaq Composite gained 16 points (0.6%) to 2,620. In light volume, 898 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.34 to $84.23 per barrel, wholesale gasoline rose $0.01 to $2.76 per gallon, and the Bloomberg gold spot price lost $8.32 to $1,667.98 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.1% at 77.04.

After the close, Google Inc. (GOOG $559) reported 3Q EPS of $9.72 and revenue of $7.52 billion, ahead of the consensus estimate of $8.74 earnings per share and $7.21 billion in sales.

Dow member JPMorgan Chase & Co. (JPM $31) reported 3Q earnings of $1.02 per share, above the $0.91 consensus estimate of analysts surveyed by Reuters, but it was unclear whether analysts had factored in a large gain from a debit valuation adjustment at its investment banking unit. However, although revenues were roughly flat year-over-year (y/y) at $24.4 billion, the figure topped the $23.4 billion that the Street had forecasted. The company said mortgage net charge-offs—the amount of loans that the company does not expect to be repaid—“improved slightly but remained at extremely high levels,” and it expects mortgage credit losses to “remain elevated.” On its credit card portfolio, JPM noted that the net charge-off rate improved and its total credit reserves remained relatively flat quarter-over quarter (q/q).

Also, the company said its investment banking revenues were “down substantially,” excluding the aforementioned favorable valuation adjustment, amid a 31% drop in fees. Additionally, it noted that its retail financial services demonstrated good underlying performance, and its consumer and business banking segments posted solid revenue. Moreover, JPM said its private equity results were negatively affected by market conditions, while its tier 1 common equity ratio was 9.9%, versus 10.1% in 2Q, but above the 9.5% in the same period last year. JPM’s CEO Jamie Dimon added that, “Our shareholders should rest assured that we are being extremely cautious while navigating through this challenging economic environment.” Shares were solidly lower and the report weighed on the financial sector.

Research In Motion Ltd . (RIMM $23) was under pressure as the company apologized for its global service outages for its BlackBerry smartphones this week. RIMM noted that the service problems, which were the company’s largest in history, have been fully restored, though data backlogs may still be occurring causing e-mail delays. The company said the outage was due most likely to hardware issues.

While Safeway Inc’s (SWY $18) 3Q results beat forecasts and guidance was reaffirmed, shares struggled after the company offered a cautious tone and said consumers remain cost-conscious. In contrast, Mead Johnson Nutrition Co.  (MJN $74) used its investor day to positively pre-announce 3Q EPS of $0.76-0.78, ahead of the consensus $0.66 and its previous guidance. The company, which makes Enfamil baby formula, said it expects sales for 3Q of $934 million, above the Street estimate of $925 million, saying that despite a 9% constant dollar decline in the North America/Europe segment, strong sales growth in emerging markets, led by China, Hong Kong and Latin America, led to the positive performance. Other factors for the better performance included a favorable tax rate and currency effects, while being “partially offset by higher dairy costs and operating expenses.” Shares of MJN rose.

Jobless claims tick lower, trade deficit roughly inline with forecasts

Weekly initial jobless claims dipped by 1,000 to 404,000 last week, after the previous week’s figure was upwardly revised by 4,000 to 405,000, the level that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, fell by 7,000 to 408,000, and continuing claims dropped by 55,000 to 3,670,000, below the forecast of economists, which called for a 3,710,000 reading.

Meanwhile, the trade deficit remained at $45.6 billion in August after July’s $44.8 billion was revised higher, versus the estimate of economists, which called for the deficit to come in at $45.8 billion. Exports dipped by 0.1% month-over-month (m/m), due to declines in auto-related and capital goods, while imports were nearly unchanged compared to the previous month, as an increase in auto-related goods was offset by a decline in consumer goods. The price of imported crude oil fell 1.6% m/m to $102.62 per barrel, while the quantity of oil brought in rose 7.6% to 302.5 million barrels. Finally, the US trade deficit with China hit a new record.

Treasuries were higher, with the yield on the 2-year note down 1 bp to 0.28%, the yield on the 10-year note declined 3 bps to 2.18%, and the 30-year bond rate decreased 5 bps to 3.15%.

Weaker Chinese exports and Italian politics offset final vote on eurozone bailout fund

Chinese trade data showed a sharper-than-expected slowdown in exports during the month of September, to a rate of 17.1% y/y from 24.5% in August, while the expectation was for a gain of 20.5%. European and US markets took the data as an excuse to book some gains after a string of positive trading days. However, Chinese shares gained on the day, after the government took steps to ease access to credit for small businesses, where a combination of declining exports and high rates on loans were threatening a liquidity crunch.

Elsewhere in the Asia/Pacific region, Australia’s employment change rose by about twice the amount that was anticipated for September, bringing the unemployment rate down to 5.2% from 5.3%, where it was expected to remain. Finally, South Korea’s central bank left its benchmark interest rate unchanged at 3.25% as expected.

In Europe, the Slovakian Parliament voted in favor of expanding the capabilities of the eurozone bailout fund, known as the European Financial Stability Facility (EFSF), becoming the final member of the coalition to approve the expanded scope of the fund. However, sentiment in Europe was somewhat undermined by the political situation in Italy, where Prime Minister Berlusconi called for a confidence vote to prove he has a majority after losing a routine vote in parliament earlier this week. If Berlusconi loses the vote, he may still be able to stay in power by putting together a new coalition. Meanwhile, an Italian bond auction was met with lower demand.

In European economic news, German consumer prices for September were unrevised as expected from the preliminary report, while the UK trade deficit came in much smaller than economists had forecasted in August after a large favorable revision to the previous month’s figure.

US retail sales and China CPI key reports tomorrow

Economic releases on tomorrow’s US calendar include advance retail sales, forecasted to rise 0.7% month-over-month (m/m) in September, after a flat performance in August, while sales ex-autos and ex-autos and gas are both expected to increase 0.3%. Same-store sales results for September from the nation’s retailers reported this week were generally better than expected, while the retail sales report includes spending at supermarkets and gas stations.

Other US releases tomorrow include import prices, expected to fall 0.4% m/m, the preliminary University of Michigan Consumer Sentiment Index reading for October, forecasted to rise to 60.2 from 59.4, and business inventories, anticipated to increase 0.4% for the second straight month.

Scheduled international economic releases include eurozone CPI, Canadian manufacturing sales, Singapore becomes the first major economy to report 3Q GDP, China reports CPI, PPI, new yuan loans and money supply, and Mexico’s central bank meets and is expected to leave rates unchanged.