Evening Market Update

Traders Turn Defensive Following Recent Rise

After fluctuating above and below the flatline for most of the day, as traders appeared to be trying to settle their stomachs amid the massive swings in the markets within one week’s time, stocks accelerated to the downside in the final hour of trading. Additional austerity measures announced in Europe and their impact on the euro-zone and global recovery dominated the headlines, while a modest drop in weekly initial jobless claims, which remain at a stubbornly high level, and a larger-than-expected increase in import prices did little to motivate buyers. Treasuries finished higher and the euro came under continued pressure amid the uncertainty. In equity news, Dow member Cisco Systems and reported better-than-expected results, as did Whole Foods Market, while Kohl’s posted favorable earnings but provided a mixed outlook. In M&A news, the US subsidiary of German software firm SAP AG announced that it has signed a definitive agreement to acquire US software firm Sybase for about $5.8 billion, and Sprint Nextel unveiled a pre-paid wireless plan through Wal-Mart Stores.

The Dow Jones Industrial Average fell 114 points (1.1%) to close at 10,783, while the S&P 500 Index lost 14 points (1.2%) to 1,157, and the Nasdaq Composite was 31 points (1.3%) lower at 2,394. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil fell $1.25 to $74.40 per barrel, wholesale gasoline lost $0.02 to $2.20 per gallon, while the Bloomberg gold spot price declined $6.50 to $1,232.43 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% to 85.29.

Dow member Cisco Systems Inc. (CSCO $26) reported fiscal 3Q EPS ex-items of $0.42, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 27% year-over-year (y/y) to $10.4 billion, above the $10.2 billion that the Street had forecasted. The company said it witnessed a return to strong balanced growth across geographies, products and customer segments that it has not seen since “before the global economic challenges began.” CSCO issued 4Q revenue guidance that matched analysts’ expectations. Shares were lower following the guidance, which suggests that analysts may have been looking for a more favorable outlook, and as the company’s CEO sounded a cautious tone on its conference call with analysts.

In M&A news, the US subsidiary of German software firm SAP AG (SAP $45) announced that it has signed a definitive agreement to acquire US software firm Sybase Inc. (SY $56) in an all cash offer of $65.00 per SY share, or $5.8 billion. The companies said the deal will allow customers to be better able to harness today’s explosion of data and will help companies become better-run “unwired enterprises.” SY was sharply higher.

Kohl’s Corp. (KSS $55) announced 1Q EPS of $0.64, two pennies above the Street’s forecast, with revenues rising 10.9% y/y to $4.0 billion, roughly inline with expectations, with same-store sales—sales at stores open at least a year—increasing by 7.4% y/y. KSS issued 2Q EPS guidance that missed analysts’ forecasts, but raised its full-year EPS outlook. The company said consumers appeared to be a little more confident in their spending, but remain focused on value and ways to make their dollars go farther. KSS added that it will continue to be flexible in its sales and inventory planning as well as expense management in order to react to changes in consumer demand. Shares came under pressure.

Whole Foods Market Inc. (WFMI $43) reported fiscal 2Q EPS ex-items of $0.38, four cents above what analysts were anticipating, with revenue increasing 13% y/y to $2.1 billion, above the $2.0 billion that the Street was expecting. Same-store sales excluding four relocations rose 7.7% y/y and the natural and organic foods supermarket said the “extremely strong growth” in same-store sales helped its 2Q results to the best performance it has reported in “several years.” WFMI raised its full-year guidance and shares were solidly higher.
Sprint Nextel Corp. (S $4) was nicely higher after the company announced that it will launch a pre-paid program through Wal-Mart Stores Inc. (WMT $53), charging seven cents per minute for calls and an equal amount for text messages. The service is set to kick off on Saturday at more than 700 WMT stores.

The Wall Street Journal reported that New York Attorney General Andrew Cuomo submitted subpoenas for eight banks, including Bank of America’s (BAC $17 ¹) Merrill Lynch & Co., Morgan Stanley (MS $28), Goldman Sachs Group (GS $145) and Citigroup (C $4) in a probe to determine whether the banks misrepresented mortgage-backed securities in order to gain favorable credit ratings. The three credit rating agencies, Standard & Poor’s, Moody’s and Fitch Ratings received subpoenas as well, as the query is focused on the banks’ dealings with the rating agencies surrounding a variety of structured financial products. All four banks finished lower on the day.

Jobless claims dip, import prices rise slightly more than anticipated

Weekly initial jobless claims declined by 4,000 to 444,000, versus last week's figure which was upwardly revised by 4,000 to 448,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 440,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 9,000 to 450,500, and continuing claims rose by 12,000 to 4,627,000, compared to the decline to 4,590,000 that was anticipated.

The Import Price Index rose 0.9% month-over-month (m/m) for April, compared to the expectation of economists, which called for the index to increase by 0.8%. Year-over-year, import prices are higher by 11.1%, versus the 11.3% forecast of economists. Petroleum prices led the advance, rising 3.3% m/m, and up 58.7% y/y, while food prices rose 1.2%.

Treasuries showed little reaction to the jobs and import price data, but finished higher on the day as the equity markets lost ground. The yield on the 2-year note was down 4 bps to 0.83%, the yield on the 10-year note lost 4 bps to 3.54%, and the 30-year bond yield was 5 bps lower at 4.43%.

Portugal added to the mix

Following in the footsteps of Spain’s announcement yesterday that it will deploy austerity measures, Portugal said it has identified new austerity measures of its own to accelerate planned cuts to its budget deficit to 7.5% of GDP for this year and to 4.6% of GDP next year in order to avoid a Greece-style debt crisis. According to a report in the Wall Street Journal, Portugal Finance Minister Jose Socrates, speaking to reporters after a cabinet meeting, said the “additional measures are fundamental to defend Portugal and our economy, and to reinforce our credibility in international markets.” The actions will include a 1% increase in the Value-Added Tax (VAT) across the board, with up to a 21% rate for other goods and services, as well as a 5% reduction in the salaries of government ministers and other top-tier state employees.

The economic calendar in the region was relatively light as several European markets were closed for Ascension Day, with UK consumer confidence improving to a level above economists’ expectations, while a separate report showed the UK trade deficit widened by a larger amount than forecasted.

In Asia/Pacific economic news, Japan’s trade surplus widened by an amount that was smaller than economists’ forecasted, while separate reports showed the current economic outlook improved by a larger amount than expected.

Week ends with plethora of economic reports

Tomorrow, the US economic calendar will reach its pinnacle for the week with a plethora of reports that may have a chance to sway sentiment. Industrial production is expected to increase 0.7% for April, while capacity utilization is forecasted to tick higher from 73.2% in March to 73.8% in April. The focus of this report will likely on the production component as capacity utilization will likely remain below the historical average and keep inflation concerns subdued. March’s production report disappointed some as it showed a much smaller-than-forecasted increase and showed the second-straight month of slower growth. However, the volatile component of utilities provided the lion’s share of the drag amid warmer weather following February’s cold-snap, and the manufacturing component of the report posted a solid gain along with business equipment and construction, helping soothe some of the concerns about the continuation of the recovery.

However, Friday’s headlining report may come in the form of the April advance retail sales report, expected to increase 0.2%, following the strong 1.6% increase that was seen in March. The early Easter Holiday pulled sales forward into March, which helped last month’s solid growth and contributed to some of last week’s disappointing April same-store sales reports, helping explain part of the low forecast for April. Moreover, the outlook by investors for the consumer continues to remain cautious, illustrated by Tuesday’s tepid response to Macy’s Inc. (M $24) better-than-expected earnings report and today’s mixed guidance and outlook from Kohl’s Corp.

Also on tomorrow’s US economic docket is business inventories, forecast to have increased 0.4% in March, and the preliminary reading of the University of Michigan’s consumer sentiment survey, expected to rise to level of 73.5

Overseas, economic reports include CPI from Spain and Italy, 1Q GDP figures for Hong Kong, while Canada will offer manufacturing sales data.