Evening Update

Global Debt and Employment Concerns Send Stocks Tumbling

Stocks finished the day solidly lower after a disappointing jobless claims report combined with ongoing concern about sovereign debt problems in Europe to dampen sentiment. The dollar and Treasuries finished the day higher as investors sought a flight-to-safety. Investors appeared apprehensive about tomorrow’s key labor report after the weekly reading of jobless claims failed to meet expectations. In equity news, Cisco Systems reported strong earnings that beat consensus estimates and gave positive guidance. Numerous same-store sales reports for January were released, with positive results coming from a number of retailers, including Costco, Macy’s, Kohl’s, Gap and J.C. Penny, while Target failed to meet the Street’s sales forecast. Visa reported better-than-expected earnings, but rival MasterCard missed analysts’ forecasts. In other equity news, Toyota reported improved earnings and sales figures, but ongoing recall issues sent shares of the company lower.

The Dow Jones Industrial Average fell 268 points (2.6%) to close at 10,002, the S&P 500 Index lost 34 points (3.1%) to 1,063, and the Nasdaq Composite declined 65 points (3.0%) to 2,125. In moderate volume, 1.5 billion shares were traded on the NYSE and 2.8 billion shares were traded on the Nasdaq. Crude oil was $3.89 lower at $73.09 per barrel, wholesale gasoline fell $0.09 to $1.95 per gallon, and the Bloomberg gold spot price plunged $44.93 to $1,064.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.7% to 79.92.

Dow member Cisco Systems (CSCO $23) reported fiscal 2Q EPS ex-items of $0.40, five cents above the consensus estimate of Wall Street analysts, with revenues increasing 8% year-over-year (y/y) to $9.8 billion, compared to the consensus estimate of $9.4 billion. The company said it saw dramatic across-the-board acceleration and sequential improvement in its business in almost all areas and its results provide a clear indication that it is entering the second phase of the economic recovery. Cisco also gave an optimistic forecast for their fiscal 3Q, predicting revenue growth of 23-26% from the same quarter last year and announced plans to hire between 2,000 and 3,000 people in the coming months. Shares were higher.

Visa (V $83) reported fiscal 1Q EPS of $1.02, compared to the Street’s forecast of $0.91, as revenues rose 13% y/y to $2.0 billion, versus the $1.9 billion that analysts were expecting. The credit card processing firm said its payment volume grew 2.5% y/y and total processed transactions rose 12% y/y. However, MasterCard (MA $222) posted 4Q EPS ex-items of $2.43, missing the Street’s forecast of $2.46, with revenues growing 6% y/y to $1.3 billion, matching analysts’ forecasts. MA said its number of transactions processed increased 6.7% y/y and the gross dollar volume increased 5.3% y/y. Shares of V were lower, while MA shares fell by over 10%.

Yum Brands (YUM $33) reported 4Q EPS ex-items of $0.50, two cents above the Street’s consensus estimate, with revenues dipping 1% y/y to $3.4 billion, just above the $3.3 billion that analysts had expected. The parent of Pizza Hut, KFC, and Taco Bell said an 8% y/y gain in sales in mainland China helped its international segment increase sales by 2% y/y, but was offset by a 7% y/y decline in sales in the US. Shares were lower.

Meanwhile, major retailers are reporting January same-store sales results—sales at stores open at least a year—headlined by Target (TGT $49) posting a 0.5% y/y gain in same-store sales, compared to the Reuters forecast of a 1.4% increase. TGT said its January same-store sales matched their expectations as lower clearance sales held back its growth. The retailer added that it experienced strong guest traffic in January, and same-store sales in both its apparel and home categories were positive for the month. “We believe these trends, combined with very clean inventories, position Target to continue to gain market share profitability in the challenging environment we expect in 2010,” the company said. Shares were down solidly

Costco Wholesale (COST $59) reported January same-store sales rose 8% y/y, including the impact of fuel and foreign exchange, just above the 7.8% increase that analysts had expected. COST said, excluding the impact of fuel and foreign exchange, sales would have increased 2%. COST ended the day higher.

Macy’s (M $17) announced that its same-store sales in January rose 3.4% y/y, an unexpected increase as the Street expected sales to come in flat, and the department store raised its 4Q earnings guidance “significantly,” on better-than-expected sales and expense management and gross margins. In other department store sales, Kohl’s (KSS $50) reported a 6.5% y/y increase in same-store sales for January, well above the 2.8% increase that the Street was looking for, and the company raised its 4Q EPS outlook. Meanwhile, J.C. Penney (JCP $25) reported its January same-store sales fell 4.6% y/y, compared to the decline of 4.9% that analysts had forecasted. Shares of M traded higher, while KSS and JCP were lower.

In other retailer results, Gap Inc. (GPS $19) reported that its January same-store sales were up 5% y/y, topping the 4.4% gain that analysts had forecasted, and issued 4Q EPS guidance that exceeded the Street’s forecasts. Limited Brands (LTD $20) announced that its same-store sales rose 6% y/y, versus the 0.5% gain that was expected, while Abercrombie & Fitch (ANF $33) posted an 8% y/y jump in January same-store sales, compared to the 8.4% decline that was anticipated. GPS and ANF were higher, while LTD was lower.

Toyota Motor Corp (TM $72) shares fell for the third-straight day, even after the company posted better-than-expected 3Q profits, as net revenues grew 10.2% and total sales increased by approximately 12%, compared to the same period last year. Toyota attributed the turnaround to cost-cutting and the recovery of sales in Asia and North America. However, the company continues to deal with recall issues and questions over their product reliability and safety. The auto maker estimates the recalls will cost the company around $1.1 billion and will cause sales to fall by about 100,000 globally, of which 80,000 would be in North America and will be accounted for evenly over the third and fourth quarters.

Jobless claims unexpectedly increase, productivity rises at smaller rate than forecasted

Weekly initial jobless claims unexpectedly increased, rising by 8,000 to 480,000, versus last week's figure which was revised upward by 2,000 to 472,000, and compared to the consensus, which called for claims to decrease to 455,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 11,750 to 468,750, and continuing claims increased from a downwardly revised 4,600,000 to 4,602,000, compared to the 4,581,000 forecast.

Elsewhere, nonfarm productivity rose at a 6.2% annual rate in 4Q, below the Bloomberg forecast of 6.5%. The gain in productivity reflects increases of 7.2% in output and 1.0% in hours worked. The increase in hours worked was the first quarterly increase since 2Q 2007. Unit labor costs fell 4.4%, versus a drop of 3.5% that was estimated as the increase in productivity outpaced the increase in hourly compensation.

Meanwhile, factory orders rose 1.0% month-over-month (m/m) in December, besting the 0.5% forecasted rise, the fourth-straight monthly increase, while November’s increase was revised slightly lower from 1.1% to 1.0%. December’s durable goods orders—reported last week—were revised higher as part of the report to a gain of 1.0% versus the initial report of a 0.3% increase. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, rose 2.2%, from the initial report of a 1.3% gain.

Treasuries finished solidly higher after extending gains following the jobless claims report and as equities fell, exacerbated by growing concerns about the sovereign debt in the Eurozone. The yield on the 2-year note fell 8 bps to 0.80%, the yield on the 10-year note lost 11 bps to 3.59%, and yield on the 30-year bond declined 11 bps to 4.53%.

Continued sovereign debt problems dominate international focus

News out of Europe focused on two key central bank announcements, while sovereign debt concerns in the Eurozone continued to weigh on global sentiment. The Bank of England left its benchmark interest rate unchanged at a record low of 0.5%, while announcing no increase to its 200 billion pound asset purchase program. Both moves were expected. The BoE’s 200 billion pound asset-buying program was exhausted last week, and it said, “The Committee will continue to monitor the appropriate scale of the asset purchase program and further purchases would be made should the outlook warrant them.” Meanwhile, the European Central Bank expectedly kept its benchmark interest rate unchanged at 1.00%, and traders paid attention to the customary press conference by ECB President Jean-Claude Trichet that followed the announcement. Trichet said current rates remain appropriate and that the Eurozone’s economy is expected to grow at “a moderate pace” with the recovery being uneven and the outlook remaining subject to uncertainty. The ECB head noted, “We will continue our enhanced credit support to the banking system, while taking into account the ongoing improvement in financial market conditions.” Per Bloomberg, Trichet added that he will wait for new growth and inflation forecasts in March before deciding when the ECB will step up the withdrawal of measures used to battle the financial crisis.

Sovereign debt concerns also weighed on sentiment in Europe as government deficit fears in Spain and Portugal joined Greece, exacerbated by a disappointing debt auction in Portugal yesterday and surging rates today to insure the debt of these nations. ECB President Trichet said the Committee is “confident” that the Greek government can cut its deficit below the European Union’s limit. Portugal’s public debt-to-GDP number is expected to rise to 91% by 2011, from 77% last year, according to European Commission forecasts, while Greece’s ratio will increase to 135% from 113% and Spain’s will increase to 74% from 54%.

In other economic news, German factory orders unexpectedly fell by 2.3% in December, nearly erasing the 2.7% gain seen in November, and lower than the 0.2% increase expected by economists in a Bloomberg survey. UK home prices rose by a smaller amount than expected, Australian retail sales and building approvals came in higher than expected and Canadian building permits rose 2.4%, versus an estimate of 2.5%.

Gain in jobs anticipated

Nonfarm payrolls will headline the week on Friday, with the Bloomberg survey of economists forecasting payrolls increased by 15,000 in January, which would mark the second monthly job increase since December 2007, the month the recession began, after rising 4,000 in November and then subsequently falling 85,000 in December. The unemployment rate is estimated to be unchanged at 10.0%.

Jobs data released this week was mixed, with the ADP Employment Change Report showing private sector payrolls fell by 22,000 jobs, less than the forecast of 30,000 jobs in January, and payrolls for the two prior months were revised higher by a total of 47,000. The ADP report has been overstating job losses relative to the government’s nonfarm payrolls report in recent months, and exclude government payrolls, which will start to be boosted by Census hiring as soon as tomorrow’s report. Also, the ISM surveys both showed an improvement in business sentiment on employment. On the other hand, initial jobless claims have been increasing since the start of the year, with the 4-week average increasing for three-straight weeks.

The other release on tomorrow’s US economic calendar is consumer credit, expected to have fallen by $10.0 billion in December.

The international economic calendar will yield the UK PPI report, German industrial orders, Canadian employment, and Japan’s leading index. Also, the Bank of Australia releases its quarterly commentary on inflation and the economy.