Evening Market Update

Equity Markets Tumble, Confidence Wanes in US and Abroad

Stocks tumbled right out of the gates today and finished solidly lower, as a downward revision to a key piece of Chinese economic data and lingering euro-area financial market concerns combined with a larger-than-expected drop in US consumer confidence to induce a selloff. The lone positive point on the domestic economic front was an increase in a gauge of US home prices, which was boosted by the rush to the end of the homebuyer tax credit. In equity news, 3M Co issued a better-than-expected forecast for 2Q sales, while Micron Technology posted solid 3Q EPS and revenue growth, although both companies traded to the downside despite the positive news. Meanwhile, Barnes & Noble Inc reported a larger loss than analysts expected and Aaron’s Inc cut its 2Q and full-year guidance and announced that it will be closing its office furniture operations. Treasuries moved higher amid some flight-to-safety buying, as the yield on the 10-year notes closed below 3% for the first time since April of 2009.

The Dow Jones Industrial Average fell 268 points (2.6%) to close at 9,870, the S&P 500 Index lost 33 points (3.1%) to finish at 1,041, and the Nasdaq Composite plunged 85 points (3.8%) to 2,135. In moderately heavy volume, 1.6 billion shares were traded on the NYSE and 2.8 billion shares were traded on the Nasdaq. Crude oil fell $2.66 to $75.59 per barrel, wholesale gasoline lost $0.08 to $2.06 per gallon, and the Bloomberg gold spot price gained $0.90 to $1,239.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% higher at 86.10.

Dow member 3M Co. (MMM $78) announced that the company expects fiscal 2Q sales to be between $6.6-6.75 billion, reflecting an estimated 16-18% growth in organic sales volumes compared to the same period last year. MMM said new products and continued strong demand in emerging economies were factors contributing to the sales growth. Analysts were expecting the company to post 2Q revenue of $6.58 billion. Shares traded lower, but managed to outperform the broader equity markets.

Micron Technology Inc. (MU $9) announced fiscal 3Q EPS of $0.92, compared to the $0.44 Reuters estimate, but it was unclear if analysts had factored in about $488 million in accounting gains, as well as other expense adjustments that MU said were included in the above EPS figure. Meanwhile, revenues increased about 17% quarter-over-quarter (q/q) to $2.29 billion, above the $2.1 billion that the Street was expecting. The chip company said sales of its NAND flash memory chips—used in MP3 music devices and digital cameras—rose 16% q/q, due to an increase in unit sales volume, partially offset by a decrease in average selling prices. Also, the company posted a 10% q/q increase in sales of DRAM products—memory chips used in computers and video game consoles—on an increase in average selling prices and a slight increase in unit sales volume. However, shares were down sharply amid the broad-based declines in the global equity markets and as the company offered some cautious commentary regarding the possibility of lower prices for flash memory chips and tepid growth of DRAM units.

Barnes & Noble Inc. (BKS $13) reported a fiscal 4Q net loss ex-items of $0.89 per share, a larger shortfall than the $0.80 per share loss that analysts were expecting. Revenues increased 19% y/y to $1.3 billion, roughly inline with the Street’s estimate, and same-store sales—sales at stores open at least a year—fell 3.1% y/y. The company said that in light of the exciting digital opportunity before them, it is planning to redirect a significant portion of its financial resources toward investment in technology, sales and marketing. On a conference call with analysts, the company added that it expects to have about 25% of the digital book market by 2013, as sales of its Nook e-reader have exceeded company forecasts and is the primary factor fueling its e-book sales share growth. However, given the larger-than-forecasted loss and as BKS issued full-year and fiscal 1Q earnings guidance that missed analysts’ forecasts, shares were sharply lower.

Aaron’s Inc. (AAN $17) cut its 2Q and 2010 full-year earnings guidance, and said it will be closing its struggling office-furniture operations by the end of September. The rental company cited slower-than-expected customer growth and now sees 2010 EPS of $1.36 to $1.48, twelve cents lower than previously expected. The office-furniture industry is highly cyclical, and the company’s CEO said “we believe many customers are cautious as the current economic conditions are having an effect on them.” Shares of AAN were solidly lower.

Home prices rise, consumer confidence falls more than expected

The S&P/Case-Shiller Home Price Index was released showing an increase in home prices of 3.8% year-over-year (y/y) in April, above the increase of 3.4% that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.4% higher, compared to forecasts, which called for a decline of 0.1%. The report revealed that Dallas, Denver, San Diego and San Francisco have all posted six consecutive months of positive annual rates of return. Also, the report said the m/m figures were driven by the end of the Federal first-time home buyer tax credit program on April 30. Standard & Poor’s Chairman of the Index Committee David Blitzer noted that, “Other housing data confirm the large impact, and likely near-future pullback, of the federal program,” and inventory data and foreclosure activity have not shown any signs of improvement. He added that, “consistent and sustained boosts to economic growth from housing may have to wait to next year.”

Meanwhile, sentiment took a hit in late-morning action as the Conference Board released its consumer confidence report, which deteriorated to a level below expectations, falling to 52.9 in June, compared to the expectation of a dip to 62.5 from May’s downwardly revised 62.7. The headline number fell as respondents’ gauge of the present economic situation being “good” fell, while those saying conditions are “bad” moved higher. Also, those saying jobs are “hard to get” gained ground, but those saying jobs are “not so plentiful” declined. The report also revealed that expectations of improvement for the next six months in business conditions, employment, and income all decreased and those anticipating worsened conditions rose.

Treasuries notched solid gains on the consumer confidence report, and continued to drift higher throughout the day, as investors looked for safety. The yield on the 2-year note fell 3 bps to 0.59%, the yield on the 10-year note declined 7 bps to 2.95%, and the 30-year bond yield decreased 7 bps to 3.93%.

US Conference Board reports steep downward revision to China LEI

The disappointing US consumer confidence data exacerbated concerns in Europe, created by the impact of tough austerity measures that need to be made by nations across the region on the economic recovery, and the health of the European banking industry. Tomorrow’s expiration of a twelve month European Central Bank lending facility did little to help soothe the sentiment even though banks will be able to take advantage of three and six month ECB maturities that will be offered until at least October. Also, a steep downward revision to a leading economic indicator reading in China weighed on sentiment, as the US Conference Board said that China’s Leading Economic Indicators (LEI ) for April increased 0.3%, compared to a 1.2% increase in March, revised sharply lower from the previously reported 1.7% increase it reported on June 15, due to a calculation error pertaining to the total floor space started component, which posted a 0.1% negative value rather than a positive 1.3% as originally reported.

The aforementioned uneasy sentiment overshadowed some relatively favorable economic news, with a report on euro-zone economic confidence unexpectedly improving in June, while a separate business climate indicator came in above economists’ expectations. Also, Sweden’s retail sales rose more than expected. However, UK mortgage approvals were lower than anticipated, France’s consumer confidence deteriorated, while separate reports in Spain showed the nation’s retail sales fell more than forecasted, housing permits deteriorated, and Spanish consumer prices rose more than expected.

Elsewhere on the Asia/Pacific economic front, Japan’s jobless rate unexpectedly rose to 5.2% in May, from 5.1% in April, and compared to the 5.0% that economists had expected. Moreover, Japanese industrial production unexpectedly fell, declining 0.1% month-over-month (m/m) in May, compared to the flat reading that was anticipated and the 1.3% increase that was seen in April. However, separate reports showed Japan’s job-to-applicant ratio improved more than expected and small business confidence improved, while vehicle production rose 30.6% year-over-year in May, but was a slower pace than the 50.8% that was seen in April. After today’s closing bell in Asia, Taiwan and China signed the bilateral economic cooperation framework agreement (ECFA), which will likely increase trading between the two nations.

Back in the Americas, a broad reading of inflation out of Brazil increased, but at a slower pace, adding to the concerns of an overheating economy in Latin America’s biggest economy. The IGP-M index rose 0.85% in June, higher than the 0.80% increase economists expected, but lower than the 1.19% increase seen last month. The wholesale component of the reading rose 1.09%, while consumer prices fell 0.18%, led by a 1.36% fall in food prices. Elsewhere, Canadian industrial product prices increased 0.3% in May, while economists were looking for more modest increase of 0.1%.

Tomorrow’s US economic calendar will yield MBA Mortgage Applications, ADP Employment Change, expected to increase by 60,000 in June, and the Chicago Purchasing Manufacturing Index for June, which is expected to decrease to 59.0, after a surprising drop to 59.7 in May.

The international economic calendar will include Japanese housing starts, the German unemployment rate, Italian business confidence, PPI and CPI.