Evening Update

Bulls Hanging Tough

Markets overcame some disappointing economic data to finish in the green again today. Economists had expected a rise in retail sales, boosted by the Cash for Clunkers program, but that failed to happen as consumers continued to save more and spend less. Similarly, retailer Kohl’s disappointed the street with a cautious outlook for its business the rest of the year and consumer stocks in general were one of the weaker segments in the market. All news was not bad today though as 2Q earnings reports from Dow member Wal-Mart, as well as Harris Corp, Urban Outfitters, and Dr. Pepper Snapple all positively surprised. In addition, automakers Ford and GM revealed that the sudden surge in demand from the clunkers program has caused them to ratchet up their production plans to keep up. Even Europe lent some support to the bull case, as Germany and France both unexpectedly grew their economies in 2Q, giving some hope that Europe can exit the downturn sooner than expected. Meanwhile, Treasuries rose after another reassuring government bond auction and the mixed economic data.

The Dow Jones Industrial Average gained 37 points (0.4%) to close at 9,398, the S&P 500 Index rose 7 points (0.7%) to finish at 1,013, while the Nasdaq Composite increased 11 points (0.5%) to 2,009. In light volume, 778 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $0.84 to $71.00 per barrel, while wholesale gasoline rose $0.01 to $2.03 per gallon, and gold increased $7.40 to $954.50 per ounce.

Dow member Wal-Mart Stores (WMT $52) reported 2Q EPS of $0.88, three cents above the Reuters estimate, while revenues declined 1.4% to $100.1 billion, below the Street's $101.8 billion forecast. The world's largest retailer posted a US same-store sales decline of 1.2%, missing analysts' expectations of a 0.9% increase, as it said it underestimated the boost it got a year ago from the government's stimulus checks. In terms of an outlook, management noted that customers are now more disciplined in their spending and early signs from the back-to-school season show consumers merely replenishing basics. "There's a new 'normal' of saving more and spending less,” CEO Mike Duke said. CFO Tom Schoewe added that consumers are more fixated on “value,” and they are financing more of their purchases with cash and debit cards instead of credit cards. On a positive note, management said they believe WMT is gaining market share in all categories of their business as consumers turn to discount retailers during the recession. The company raised the lower end of the range of its full-year EPS guidance, issued a 3Q EPS outlook that was inline with the Street's forecast, and said 3Q same-store sales are expected to be between flat and 2%. Shares were higher.

Fellow retailer Kohl's Corp. (KSS $52) reported 2Q EPS of $0.75, one penny ahead of analyst expectations, and sales increased 2.2% versus last year to $3.8 billion, also on top of the forecast of $3.7 billion, as same-store sales for the quarter declined 2.3%. The operator of mid-priced department stores gave few indications that it is seeing an imminent recovery in consumer spending, with CEO Kevin Mansell commenting, "All of our primary research and our own response rates on events have continued to indicate the consumer is very focused on stretching their dollar, making their budget go further, and seeking optimum value.” As an example of changed consumer behavior, Mansell noted "There has been a pretty seismic shift in the way consumers are looking at handbags. They recognize they can get an incredible amount of style and quality for a much better value than they might have been willing to spend a year ago." KSS raised its full-year EPS outlook, although it is still below Street expectations. CFO Wes McDonald affirmed that the company’s guidance is cautious, but reassured analysts “We will have the inventory there to do better if the traffic is there." Shares were unchanged.

Meanwhile, mall retailer Urban Outfitters (URBN $29) revealed that its 2Q EPS came in at $0.29, also ahead of the $0.26 analyst expectation. Sales rose 1% to $459 million, as a drop in same-store store sales of 6% was offset by strong internet and catalog sales. By division, same-store sales declines were 4% at Anthropologie stores, 16% at Free People stores, and 8% at its namesake locations. In terms of consumer behavior that it is seeing, URBN noted a stark difference between fashion items and more basic merchandise. "The customer is seeking fashion, and there is practically no evidence of price elasticity on compelling product," CEO Glen Senk told analysts. "Undistinguished basics, or any commodity-like product, is another story altogether. There, it's a buyer's market, and the right price is critical." URBN traded higher today.

Estee Lauder (EL $38) posted $0.20 per share earnings in its 4Q results, matching analyst forecasts, while sales dropped 16% to $1.7 billion, also roughly inline with expectations. The weak consumer spending environment continues to impact the company, with CEO Fabrizio Freda telling investors “We don't believe the recession is over.” Freda noted that it’s tough to accurately predict what will happen in the rest of the year, explaining "More or less, we're expecting what we saw last year. This is just a reasonable assumption. No one knows for sure." For the fiscal 2010 period, the company expects operating earnings of $1.55-1.70 per share, with sales flat to 2% higher in constant currency terms. Analysts are predicting EPS of $1.42. The stock finished higher.

Ford Motor Co. (F $8) was higher after announcing that it is increasing its North American production by another 10,000 units to 495,000 units in 3Q as it builds more fuel-efficient vehicles to meet "Cash for Clunkers" demand. The lone big three automaker to avoid bankruptcy said its planned 3Q production now exceeds year-ago production levels by 18%. 4Q production will be set at 570,000 units, up 33% from a year earlier. Ford executives said they expect US auto sales to slow once funding for the clunkers program is spent, and the additional $2 billion recently approved for the incentive plan could be exhausted by late August or early September. Similarly, General Motors CEO Fritz Henderson remarked in an interview this morning on CNBC that his firm also expects “robust” sales in August and September and it will likewise be ramping up production to meet the improved demand.

Harris Corp. (HRS $36) was sharply higher after announcing fiscal 4Q earnings ex-items of $0.91 per share, easily topping the $0.82 per share profit that analysts had predicted, with revenues rising 4% to $1.3 billion, also topping expectations. The international communications and IT company said new orders increased 22% compared to last quarter at $1.3 billion. Management raised the lower end of its range for fiscal 2010 earnings and revenue guidance, due to new contract wins, improving orders rates, and a solid pipeline of additional opportunities.

Dr. Pepper Snapple (DPS $25) gained ground after the beverage maker posted 2Q EPS of $0.62, trouncing the Street's forecast by twelve cents, as revenues of $1.5 billion were roughly inline with estimates. The company said adjusted bottler case sales volumes grew 4%, and adjusted operating profit rose 16%, reflecting lower commodity and fuel costs, benefits from higher volumes, and strong cost control focus. DPS said it continues to believe net sales will decline between 2-4% for the year, while EPS for 2009 is now expected to come in at $1.88-1.96, an improvement of 18 cents over previous guidance. Analysts had been looking for earnings of $1.77 per share from the beverage group, which was spun off from British food conglomerate Cadbury (CDSCF $10) last year.

Retail sales unexpectedly fall, jobless claims surprisingly rise

Advance retail sales (chart) for July fell 0.1% month-over-month (m/m), compared to the forecast of an increase of 0.8%, while sales ex-autos dropped 0.6%, versus the expectation of an increase of 0.1%. Sales for June were revised up to 0.8% from 0.6% and ex-autos, sales in June were revised to 0.5% from 0.3%. Excluding autos, gasoline and building materials, the figure the government uses to calculate the consumer spending component of GDP, sales fell 0.2%. Sales at automobile dealerships and parts stores rose 2.4% during the month, while gasoline station sales fell 2.1%.

Weekly initial jobless claims rose 4,000 to 558,000, versus last week's figure that was upwardly revised by 4,000 to 554,000. The Bloomberg consensus called for claims to reach 545,000. The four-week moving average snapped a streak of six-straight weekly declines, increasing by 8,500 to 565,000. Continuing claims fell by 141,000 to 6,202,000, versus the forecast of 6,300,000.

Elsewhere, the Import Price Index (chart) fell 0.7% in July, more than the expected decrease of 0.5% of economists surveyed by Bloomberg. June's 3.2% increase was revised lower to a 2.6% advance. Imported petroleum prices fell 2.8% in July from a downwardly revised 16.2% jump in June, and non-petroleum prices fell 0.2% after gaining an unrevised 0.2% in June. Year-over-year, import prices are down 19.3%.

In other economic news, June business inventories (chart) fell 1.1%, more than the forecast of a fall of 0.9%, and May was revised lower to a decline of 1.2% from the previously reported 1.0% fall. Sales increased 0.9%, taking the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—from 1.41 in May to 1.38 in June.

Treasuries were higher following the economic data. The yield on the 2-year note fell 7 bps to 1.08%, the yield on the 10-year note dropped 12 bps to 3.60%, and the yield on the 30-year bond lost 11 bps to 4.42%.

Busy economic calendar awaits traders on Friday

A full economic calendar awaits investors tomorrow, starting with industrial production data, which is forecasted to have increased 0.4% in July, following the 0.4% drop suffered in June. At the same time, economists expect the uptick in production will raise capacity utilization to 68.3%, following the record low level of 68.0% in June. The recession has caused a sharp contraction in industrial production, which has shrunk 17 times in the last 18 months. Economists are predicting that with production now at depressed levels and inventory balances across the economy at very lean levels, some expansion is possible again. Government stimulus such as the Cash for Clunkers program is also having an impact, as seen in this morning’s announcements from Ford and GM. It is unlikely that production can continue to be cut much further. In addition, simple math shows that just by eliminating the subtractions to growth, economic data can improve. This helps to explain how the fall in 2Q GDP was so much smaller than the last two quarters, and it has also led economists to forecast GDP will turn positive in the second half of the year.

Another major inflation reading – the Consumer Price Index – will also be revealed tomorrow. It is expected that prices at the consumer level were flat in July, after increasing 0.7% in June. Similarly, when excluding food and energy, it is expected that core consumer prices increased just 0.1% last month, after the 0.2% rise in the prior period. As the Fed noted in its FOMC policy statement on Wednesday, inflationary pressures in the economy have yet to show their heads.

Rounding out the economic releases tomorrow will be the preliminary reading for the University of Michigan Consumer Sentiment Index. Economists are expecting a recovery from the disappointing retracement to 66.0 last month, back up to 69.0 in August. Prior to last month’s slip, the index had shown steady recovery since the spring. At present, generally improving economic data and a near 50% rally in the stock market are being counter-balanced by rising gas prices and mounting job losses to weigh on consumer confidence.