Evening Market Update

Markets Get Back on the Upward Track

Stocks managed to overcome early pressure to finish in the green as impressive same-store sales reports overshadowed continuing fears about Greek debt and a larger-than-expected increase in weekly initial jobless claims. With the lack of economic data released, traders instead focused on the March sales figures coming out of numerous retailers, suggesting the upcoming earnings season, which kicks off next Monday, will have a strong impact on market movement. In other equity news, the New York Times is reporting that UAL, parent of United Airlines, and US Airways are in merger talks, while a proposed merger between British Airways and Iberia is also closer to completion. Earnings were strong for Bed Bath & Beyond as the company beat estimates and raised guidance, while Forest Laboratories failed to receive approval for a lung treatment drug. Treasuries were up early on the concerns in Europe, but ended the day lower after the equity market recovered.

The Dow Jones Industrial Average gained 30 points (0.3%) to close at 10,927, while the S&P 500 Index rose 4 points (0.3%) to 1,186, and the Nasdaq Composite was 6 points (0.2%) higher at 2,437. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $0.25 lower at $85.63 per barrel, wholesale gasoline was $0.01 lower at $2.30 per gallon, and the Bloomberg gold spot price gained $1.35 to $1,150.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 81.54.

The New York Times is reporting that UAL Corp (UAUA $20), parent of United Airlines, and US Airways (LCC $8) are holding merger talks that would create the country’s second-largest carrier, combining United’s international Pacific routes and domestic mid-west focus with US Airway’s large presence on the East Coast and in the western US. Spokesmen for the companies have declined to comment, and shares of both companies posted strong advances.

Bed Bath & Beyond (BBBY $46) reported fiscal 4Q EPS of $0.86, much higher than the $0.73 Street estimate, with revenues of $2.24 billion also besting estimates of $2.2 billion, on a 11.5% increase in same-store sales, sales at stores open at least a year, above the company’s guidance of 3-5%. BBBY issued 1Q and full-year EPS guidance that exceeded analysts’ expectations. Management said that “While the economy appears to be showing some signs of improvement, we believe the consumer continues to face economic challenges and the pressures of the macroeconomic climate remain.” Tight inventory control was noted, as inventory per square foot of retail space increased only 1.8% in the quarter, compared to the 12% same-store sales growth. Shares were higher.

Forest Laboratories Inc. (FRX $28) shares traded over 13% lower after failing to receive approval from the FDA for a new treatment, to be called Daxas, to treat a lung ailment called chronic obstructive pulmonary disease.

Elsewhere, the equity news was dominated by a slew of retailers reporting better-than-expected same-store sales figures for March, with easy comparisons to a year-ago and an earlier Easter impacting the results.

Target (TGT $56) raised guidance for 1Q EPS, saying that earnings should “exceed by 10 cents or more the current First Call median estimate of 74 cents,” after reporting that March same-store sales increased 10.3% year-over-year (y/y), compared to the Reuters estimate of 7.8%, citing strength in apparel. Shares were nicely higher.

Fellow discounter Costco Wholesale (COST $61) reported March same-store sales grew 10% y/y including the impact of fuel and foreign exchange versus the 9.3% that analysts had anticipated, while increasing 2% excluding these impacts. The company said that the Easter shift negatively impacted results by approximately 1-2%. US same-store sales excluding gasoline and currency impacts were up 5%, while international markets grew 28%. Shares finished lower.

TJX Companies Inc (TJX $45) reported double-digit sales growth in March and consequently raised its earnings forecasts for Q1 and the full fiscal year. The discount retailer of fashion brands booked total sales of $2 billion for the month, leading to a 12% increase in same-store sales, compared to estimates of a 6.5% gain. TJX now projects Q1 EPS of between $0.76 and $0.79, up from a previous month estimate of $0.60 to $0.65. Shares of TJX were higher.

Amid department stores’ releases, Kohl’s Corp (KSS $57) announced strong same-store sales growth of 22.5%, much higher than the 12.4% Reuters estimate, causing the company to raise 1Q earnings to $0.55-0.57 per share from the prior earnings guidance of $0.48-0.52 per share. Kohl’s credited consistency across lines of business and regions, as well as increased customer traffic while focusing on gaining market share. Elsewhere, Macy’s Inc. (M $23) reported a comp store sales increase of 10.8% versus the 7.9% estimate, and said that it expects April same-store sales to be about flat to last year, generating an increase in same-store sales of approximately 5% for the quarter. Macy’s said that the earlier Easter benefitted sales in March and will hurt April comparisons. However, JC Penney Co. (JCP $31) posted a sales increase of 5.4%, just missing the 5.7% rise that analysts had forecasted. Shares of KSS and JCP were lower, while M shares gained ground.

Among luxury retailers, Nordstrom Inc (JWN $41) reported March same-store sales of 16.8%, much higher than the 10.6% Reuters estimate. Nordstrom shares traded lower and shares of Saks Inc. (SKS $9) were flat after announcing that its same-store sales rose 12.7%, versus the 8% gain that was anticipated.

Inside the mall, Gap Inc. (GPS $25) said its same-store sales in March rose 11%, compared to the expectation of a 3.7% gain, Limited Brands Inc. (LTD $26) announced that its same-store sales jumped 15%, above the 6.8% rise that was anticipated, while Abercrombie & Fitch’s (ANF $47) 5% increase in same-store sales missed the 6.6% that the Street had forecasted. GPS and LTD finished higher, while ANF was lower.

Jobless claims unexpectedly rise, Easter distorting data

Weekly initial jobless claims increased by 18,000 to 460,000, versus last week's figure which was upwardly revised by 3,000 to 442,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 435,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 2,250 to 450,250, and continuing claims dropped by 131,000 to 4,550,000, to the lowest level of the year, and below the 4,630,000 forecast. The Labor Department said that the week leading up to Easter and the two weeks that follow are traditionally a “volatile time,” making comparisons difficult. Treasuries turned lower in afternoon trading, erasing gains that followed the report and the uneasiness in Europe. The yield on the 2-year note was up 1 bp to 1.06%, the 10-year note yield was 3 bps higher at 3.89%, and the 30-year bond yield increased 1 bp to 4.75%.

Greek default worries continue, ECB and BoE keep rates unchanged

Continued concerns about the situation in Greece pushed the spreads of the Greek 10-year bond over the German bund higher again, reaching 448 bps during the day, with the Greek 10-year yield reaching nearly 7.6%. The Greek finance minister said the nation doesn’t need additional austerity measures as long as existing measures are implemented “correctly,” but markets are skeptical of the support the EU has offered, as it is conditional on Greece being unable to tap capital markets, which have continued to fund new debt, but the rising yields on the debt imply a negative feedback situation, wherein interest payments continue to rise, worsening the outlook for gaining control over the country’s finances.

Meanwhile, major central bank announcements were also in focus across the pond today, with the Bank of England (BoE) keeping its benchmark interest rate unchanged at a record low of 0.5%, while keeping its bond purchase program on hold. The BoE has suspended comment on monetary policy ahead of a May 6 government election, as the path of fiscal policy and its impact on the economy remains uncertain, dependent on the outcome of the election. Also, the European Central Bank (ECB) left its key lending rate unchanged at 1.0%, as expected. In the press conference held by ECB President Jean-Claude Trichet after the meeting, Trichet said that the policy rate “remains appropriate” given the prospects for only “moderate” economic growth in the 16-member euro-zone. Trichet discussed changes in the collateral rules he initially unveiled at the end of March, while saying the changes weren’t designed to help Greece. The new rules extend emergency measures that were initially set to expire at the end of 2010, and “harden slightly” the current collateral policy. Some instruments that have been used in the past two years will not be eligible, such as unregulated debt assets, subordinated debt, and bonds denominated in currencies other than euros. Trichet said “A default is not an issue for Greece,” and in reference to the Greek budget, he said “I have no reason to consider that it is not implemented rigorously.” He added that “The activation of the possible loans is really as far as I understand in the hands of the Greek government itself, then we would have to see how to organize, if it is asked, the packages in question and it is of course the responsibility of the governments,” referring to EU governments that would provide aid along with IMF loans.

In other international news, UK industrial and manufacturing production were better than forecast, with 11 of 13 categories of manufacturing rising. However, euro-zone retail sales disappointed, falling 0.6% month-over-month in February, while the expectation was for a flat reading, and German industrial production came in flat, lower than the forecast for a 1.0% rise. Japanese machine orders, an indicator of business investment in three to six months, unexpectedly fell 5.4% month-over-month in February, while estimates were for a 3.7% increase. The Shanghai Securities News reported the city of Shanghai may impose a tax to slow property prices, citing unidentified people. Elsewhere, Bangkok, the capital of Thailand, was placed in a state of emergency amid fears that anti-government protests may turn violent.

The only item on the US economic calendar for tomorrow is wholesale inventories, which are expected to increase by 0.4% after unexpectedly declining by 0.2% in January.

The international calendar will include reports on manufacturing and industrial production out of France, PPI in the UK and the unemployment rate in Canada.