Evening Update

Stocks Pause, Await Jobs Data

Stocks experienced modest pressure in today’s session, on mixed earnings reports and July same-store sales reports from retailers, and as traders preferred to stay on the sidelines ahead of the labor release tomorrow. While comparable sales for retailers were slightly worse than expected as a whole, some retailers were able to post positive comps and others fell less than expected, prompting increases in quarterly guidance. Cisco Systems gave a cautious outlook despite reporting earnings above the Street, pressuring technology shares. In other equity news, Comcast beat, DirecTV missed earnings, and Brinker International beat earnings but gave a disappointing forecast. Treasuries were mixed and weekly initial jobless claims declined more than forecasted.

The Dow Jones Industrial Average fell 25 points (0.3%) to close at 9,256, the S&P 500 Index lost 6 points (0.6%) to finish at 997, while the Nasdaq Composite declined 20 points (1.0%) to 1,973. In modest volume, 1.4 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil lost $0.03 to $71.94 per barrel, while wholesale gasoline rose $0.01 to $2.06 per gallon, and gold gained $0.15 to $963.60 per ounce.

Dow member Cisco Systems (CSCO $22) reported fiscal 4Q EPS of $0.31, two cents above the Reuters estimate, as revenues fell 18% versus last year to $8.5 billion, roughly inline with the Street's consensus. The networking company said it saw a number of positive signs this quarter in the economy and its business, especially comparing its sequential quarter-over-quarter order trends. CEO John Chambers sounded a cautious tone regarding its outlook, calling for fiscal 1Q revenue to fall 15-17%. In a volatile session, shares ended lower.

Comcast Corp. (CMCSA $15) is higher after posting 2Q EPS of $0.33, above the Street's forecast of $0.26, with revenues increasing 4.5% to $8.9 billion, above analysts' expectations that called for the company to report sales of $8.8 billion. The company said it delivered solid results, driven by the strength of its subscription business and its continued focus on expense and capital management.

Fellow TV content provider, DirecTV (DTV $25), posted 2Q EPS of $0.40, three cents shy of the Street's forecast, as revenues rose 9% to $5.2 billion—roughly inline with expectations. DTV said US net subscriber additions increased 74% to 224,000, driven by a 17% increase in gross additions and a monthly churn rate of 1.51%. Shares gave up an early gain and were lower.

Brinker International (EAT $15) announced 4Q earnings of $0.52 per share versus analysts estimates of $0.48, and same-store sales fell 9%. However the operator of Chili’s, On The Border and Maggiano’s restaurants gave FY 2010 guidance of same-store declines of 2-4% and earnings down 10-20%, or $1.15-1.29, lower than estimates of $1.59. Earnings guidance from the company for 1Q of $0.12-0.14 is also below the consensus $0.29. In giving forecasts, Brinker noted “extreme volatility and limited visibility” likely to impact sales, and actual results could differ considerably from projections. The company said the current “3 courses, 2 people, $20” promotion boosted same-store sales to down low- to mid-single digits versus the down double-digits the company experienced as July started, but hampered profitability. Shares fell over 15%.

Retailer same-store sales for July were released today, falling 5.1%, worse than the 5.0% decline expected. Wal-Mart no longer releases monthly comparable sales (comps). Department stores and luxury retailers continue to post solid declines in sales, while discounters posted unexpected misses. However, not all the news was negative, as some retailers were able to post positive comps and others fell less than expected, prompting increases in quarterly guidance. Retailers cited a later back-to-school season this year pushed out the typical boost in sales from several state-tax holidays to August from July.

Discounters posted disappointing comps, with Target (TGT $42) reporting July same-store sales dropped 6.5%, versus the same period a year ago, inline with its internal forecast but a larger decrease than the Reuters estimate, which called for the company to record a 5.8% decline. TGT said, "While our sales remain challenging, we continue to experience favorable gross margin performance within categories and disciplined expense control in our retail segment, as well as modestly improving risk trends in our credit card segment." Costco (COST $49) reported July same-store sales fell 7%, a larger decline than the Reuters estimate, which called for the company to record a 6.7% decline. Shares of both TGT and COST were lower.

Despite reporting solid declines in comps, several department stores raised quarterly earnings guidance. Macy's (M $15) reported same-store sales dropped 10.7% in July, versus the Street's forecast, which called for the company to post a 9.1% decline. The department store issued 2Q EPS ex-items guidance that topped analysts' forecasts. Kohl's Corp. (KSS $51) announced that its same-store sales for July rose 0.4%, better than the decline of 3.2% that had been anticipated. KSS raised its 2Q EPS guidance on improved gross margin and expense management. JC Penney (JCP $31) posted a 12.3% drop in July comparable store sales, which was a larger drop than the 11.4% decline that was forecasted by the Street, but better than internal estimates. JCP mentioned the impact on sales from shift of several state tax-free shopping periods as well as lower levels of clearance inventory relative to last year. JCP raised its 2Q EPS guidance, oncontinued improvement in gross margin and operating expenses. Shares of M, KSS and JCP were all higher.

Shares of luxury retailer Nordstrom (JWN $28) were nearly unchanged, despite reporting a 6.9% decline in same-store sales for July, versus the 11.1% drop that the Street's forecast called for.

Among specialty retailers, Limited Brands (LTD $14) was sharply higher after announcing a smaller-than-expected drop in its July same-store sales, which fell 7%, compared to the 12.4% decrease that was expected. Gap, Inc. (GPS $18) said its same-store sales fell 8% for the month of July, which was better than the 8.5% drop that the Street had forecasted, as the retailer said its merchandise margins were "significantly" above last year. Gap raised its 2Q earnings forecast to $0.30-0.32, higher than the consensus of $0.28. Shares of Gap were up nicely.

As Director of Market and Sector Analysis, Brad Sorensen, CFA discusses in his bi-weekly "Schwab Sector Views," while consumers are continuing, either by force or by choice, to deleverage or save instead of spend, it seems unlikely that spending returns to anything like what we saw only a couple of years ago. However, Americans have a propensity to spend, which leads us to believe that a sustained severe retrenchment is unlikely at this point. Brad believes the positive and negative factors are balanced for the consumer discretionary sector, leading to his Marketperform rating.

Jobless claims fall, but continuing claims rise to snap streak of declines

Weekly initial jobless claims (chart) fell 38,000 to 550,000, versus last week's figure that was upwardly revised by 4,000 to 588,000. The Bloomberg consensus called for claims to reach 580,000. The four-week moving average declined for a sixth-straight week, falling by 4,750 to 555,250. Continuing claims failed to drop for a fourth-consecutive week, rising by 69,000 to 6,310,000, versus the forecast of 6,250,000. Treasuries were mixed, relinquishing early gains following the report. The yield on the 2-year note was unchanged at 1.21%, the yield on the 10-year note added 1 bp to 3.76%, while the yield on the 30-year bond fell 1 bp to 4.54%.

Key reading on the health of job market under scrutiny tomorrow

The release of nonfarm payrolls will be in focus tomorrow, with the Bloomberg survey of economists forecasting payrolls fell 328,000 in July, an improvement from the 467,000 decline experienced in June. The unemployment rate is expected to continue to rise to 9.6% in July, up from 9.5% in June. June’s report was disappointing on many fronts, and the market sold off in the following sessions. The report marked a reversal in a trend of smaller job losses, flat average hourly earnings, and a decline in the average workweek, with declines in employment spread across many sectors, but was on top of a sharp improvement in the May report, where payrolls fell 322,000.

Weekly initial jobless claims have been improving, although they have been somewhat distorted by fewer layoffs in the auto sector than seen typically during summer production shutdowns, although today’s release did not have any auto sector adjustment, and still showed a 104,000 decline in the four-week average of claims from the peak. Yesterday’s ADP Employment Report showed a loss of 371,000 private sector jobs, worse than the 350,000 expectation.

Consumer credit is the other release on the US economic calendar tomorrow, where credit is expected to have declined by $5.0 billion in June.