Markets Gain Early, Lose Ground on Fed Beige Book Report
Stocks finished the day mixed in a lackluster session after giving up modest early gains resulting from a better-than-expected improvement in the ISM Non-Manufacturing Index. The tide seemed to turn after the release of the Fed’s Beige Book, which showed that economic activity remains at a low level, although conditions improved modestly across a broader geographic region. In equity news, Medivation Inc. shares plunged after the company announced that its investigational Alzheimer’s treatment-collaborated with Dow member Pfizer-failed to meet cognition and global functioning efficacy goals in late-stage trials. On the M&A front, Novell Inc. confirmed that it has received an unsolicited bid to be acquired by private equity firm Elliot Associates, L.P. In earnings news, Big Lots Inc. and Joy Global posted results that beat the Street’s expectations, while Costco Wholesale Inc. and BJ’s Wholesale Club Inc. failed to meet analysts’ forecasts, while BJ’s also gave a cautious view for the next year. In other economic news, the ADP Employment Change revealed that private sector payrolls fell by an amount that matched expectations and mortgage applications rose over the past week. Treasuries finished the day slightly lower.
The Dow Jones Industrial Average fell 9 points (0.1%) to close at 10,397, the S&P 500 Index was 1 point (0.0%) higher at 1,119, and the Nasdaq Composite was flat at 2,281. In moderately light volume, 900 million shares were traded on the NYSE and 2.5 billion shares were traded on the Nasdaq. Crude oil was $1.15 higher at $80.83 per barrel, wholesale gasoline rose $0.05 to $2.05 per gallon, and the Bloomberg gold spot price increased $5.10 to $1,139.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.7% to 80.00.
Shares of Medivation Inc. (MDVN $13) were down over 60% after the biotech firm, along with fellow drugmaker and Dow member Pfizer Inc. (PFE $17), announced that results from two Phase-3 trials showed its investigational Alzheimer’s treatment failed to meet primary and efficacy endpoints compared to a placebo. PFE also traded lower.
M&A activity continued today, with Novell Inc. (NOVL $6) up over 25% after the IT management software firm confirmed that it has received an unsolicited, conditional proposal from private equity firm Elliot Associates, L.P.—which already owns an 8.5% stake in NOVL—to acquire the company for $5.75 per share in cash, valuing the company near $2.0 billion. NOVL said it anticipates that its Board will review the proposal.
Joy Global (JOYG $55) reported fiscal 1Q EPS of $0.73, above the $0.64 that analysts were expecting, with revenues declining 3% y/y to $729 million, compared to the $663 million that the Street was anticipating. The mining firm said it continues to see strength in the international and emerging markets for all commodities, and the US thermal coal market is correcting faster than expected. JOYG maintained its full-year revenue guidance and it raised the low end of its previous earnings forecast. JOYG was up solidly.
Costco Wholesale Corp. (COST $61) reported fiscal 2Q EPS ex-items of $0.70, two cents shy of the consensus estimate of Wall Street analysts, with revenues increasing 11% year-over-year (y/y) to $18.4 billion, but also just short of the Street’s forecast of $18.6 billion. Total same-store sales—sales at stores open at least a year—rose 9% including the impact of gasoline inflation and foreign exchange, while excluding fuel and currency, same-store sales rose 3%. Shares finished the day lower.
Fellow wholesaler BJ’s Wholesale Club Inc (BJ $35) announced fiscal 4Q EPS of $0.95, one cent lower than analysts expected. The results included a $0.03 per share legal gain and the company also gave a cautious outlook for 2010, with profit estimates of $2.54 to $2.64 per share, compared to analysts’ average estimates of $2.74. BJ’s reported February same-store sales rose 7.5% y/y, partly due to higher gasoline prices. Shares of BJ were lower.
Meanwhile, shares of closeout retailer Big Lots Inc. (BIG $35) is traded higher after it reported adjusted earnings of $1.31 per share, three pennies above the Street’s expectation, with revenues increasing 7.0% y/y to $1.5 billion, roughly inline with analysts’ forecasts. BIG increased its share buyback program and issued 1Q and full-year EPS guidance that exceeded the Street’s forecasts.
Fed’s report adds some recovery support
The Federal Reserve released its Beige Book, a report on business activity from the Fed’s business contacts in all twelve Fed Districts across the nation and is one of many tools used by the Federal Open Market Committee (FOMC) when determining its monetary policy. The report indicated that while economic activity remains at a low level, conditions improved modestly further, and those improvements are broader geographically than in the last report. The Fed said ten Districts reported some increased activity or improvement in conditions, while the remaining two—Philadelphia and Richmond—reported mixed conditions, compared to that last report, in which eight reported improving conditions and four with little change and/or mixed conditions.
Positive aspects of the release included a better 2009 holiday season than 2008 for consumer spending—but still far below 2007—manufacturing activity in most Districts increasing or holding steady since the last report, home sales increasing, especially for lower-priced homes, and price pressures remaining subdued in nearly all Districts.
However, there were some negative aspects of the report, with residential construction remaining at low levels in most areas, loan demand continuing to decline or remaining weak, credit quality continuing to deteriorate, and labor market conditions remaining generally weak—although some hiring and modest wage increases were reported in a few Districts.
The ISM Non-Manufacturing Index increased by a larger than expected amount, improving from 50.5 in January to 53.0 in February—the highest level since October 2007—and versus the 51.0 that economists surveyed by Bloomberg had anticipated the gauge of service sector activity to reach. A reading of 50 is the separation point between expansion and contraction. New orders ticked higher, rising from 54.7 to 55.0, and the business activity component moved up to 54.8, reflecting growth for the third-consecutive month. Employment, although remaining under the 50 mark, moved from 44.6 to 48.6—the highest since April 2008.
Despite the service sector index sitting in expansionary territory for the second-straight month, the initial reaction to the report was somewhat subdued as the index has flirted with the 50 mark recently and has not showed as clear of an improvement as the ISM Manufacturing Index, which remained in expansionary territory for the seventh-straight month. The reason for some skepticism regarding an expansionary trend in the service sector has to do with the headwinds that continue to face the consumer.
The ADP Employment Change Report was released and showed private sector payrolls fell by 20,000 jobs in February, matching the forecast of economists surveyed by Bloomberg, and January’s figure was revised to a larger-than-initially reported loss of 60,000. February’s decline was the smallest since the gauge showed payrolls rose in January 2008. The ADP report has been overstating job losses relative to the government’s nonfarm payrolls report in recent months. The Bureau of Labor Statistics will release nonfarm payrolls on Friday, with the Bloomberg survey of economists forecasting payrolls decreased by 58,000 jobs in February, and that the unemployment rate ticking higher from 9.7% to 9.8%.
In other economic news, the US MBA Mortgage Application Index rose 14.6% last week, after the index, which can be quite volatile on a week-to-week basis, fell 8.5% in the previous week. The increase came as the Refinance Index advanced 17.2%, and the Purchase Index rose 9.0%. The average 30-year mortgage rate declined 9 basis points to 4.95% and remains above the record low of 4.61% that was reached at the end of March 2009.
Treasuries were slightly lower on the day, as the yield on the 2-year note was up 2 bps to 0.80%, the yield on the 10-year note increased 1 bp to 3.62%, and the yield on the 30-year bond rose 1 bp to 4.58%.
Greece announces austerity plan to fight debt problems
Greece has approved additional measures to reduce its deficit, including tax increases, pension freezes and public sector pay cuts, which are expected to save 4.8 billion euros ($6.5 billion), equivalent to 2% of the nation’s GDP. But traders continue to grapple with whether these measures by Greece will be enough to convince eurozone members that it is committed to getting its deficit problems under control, which may open the door for some form of support, led by Germany. Greece’s leaders are expected to meet with German officials on Friday to discuss. Greek Prime Minister George Papandreou warned that if the new measures failed to win support of the European Union and the markets, his country would have to turn to the International Monetary Fund for support. He added that “from today the problem can’t be considered ‘Greek’. We are doing what we must and more, so now, it is the time of Europe.” Moody’s Investor Service said that Greece’s additional fiscal measures are consistent with Moody’s current A2 rating, with a negative outlook, for the nation’s government bonds. A senior analyst in Moody’s Sovereign Risk Group said, “These new measures are a clear manifestation of the government’s resolve to regain control of public finances.”
Meanwhile, the European markets had plenty of additional economic data to consider, headlined by upbeat reports out of the UK. Separate reports out of Britain showed UK consumer confidence rose six points to a two-year high of 88, while its PMI Services posted a reading suggesting the fastest pace of expansion in three years, per Bloomberg. Elsewhere, PMI Services in Germany was unexpectedly revised slightly higher, and Italy’s Services PMI came in at a higher level than anticipated, while the final revisions of the same gauge of services in France and the overall euroarea were unexpectedly revised lower. Rounding out the busy day, separate reports showed retail sales in Germany, which were forecast to decline, came in flat for January month-over-month (m/m), while a 0.3% m/m decline in January eurozone retail sales matched economists’ estimates.
Factory orders and pending home sales to be reported tomorrow
Major releases on tomorrow’s US economic calendar include factory orders, pending home sales and the weekly initial jobless claims reading. Factory orders are expected to have risen 1.8% m/m in January, after a better-than-expected increase of 1.0% in December. January pending home sales are expected to have increased 1.0% m/m, which would match the gain seen in December. Economists are predicting a decrease in weekly initial jobless claims to 470,000, from a previous reading of 496,000.
Tomorrow’s international economic releases include eurozone GDP, announcements of interest rates out of the UK and eurozone (both expected to be kept unchanged at 0.5% and 1.0% respectively), Japanese capital spending, and a monthly industrial production reading out of Brazil.
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