Evening Market Update

Recovery Sentiment Wanes and Consumer Names Miss

Stocks fell as sentiment about global recovery continued to tilt to the pessimistic side after a week that saw a plunge in housing sales and a downgrade of the assessment of the economy by the Federal Reserve, which noted the negative impact of the euro-zone debt crisis and its impact on credit spreads globally, and the cost to insure Greek debt, as represented by credit default swaps spreads, rose to a record high. Investors paid little heed to today’s better-than-expected durable goods and initial jobless claims reports, and Treasuries were mixed. Consumer discretionary names led the downside after Bed Bath & Beyond Inc issued disappointing guidance, while Nike Inc, Lennar Corp, Darden Restaurants Inc and ConAgra Foods all missed quarterly estimates. In technology news, Dell Inc issued guidance and comments that disappointed and Oracle reported an earnings beat after the close.

The Dow Jones Industrial Average lost 146 points (1.4%) to close at 10,153, the S&P 500 Index fell 18 points (1.7%) to finish at 1,074, and the Nasdaq Composite declined 37 points (1.6%) to 2,217. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil gained $0.16 to $76.51 per barrel, wholesale gasoline increased $0.01 to $2.09 per gallon, and the Bloomberg gold spot price increased $3.80 to $1,241.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat 85.76.

After the close, Oracle Corp (ORCL $22) reported 4Q earnings of $0.60 per share, six cents better than the Reuters estimate of $0.54, as revenues came in better than expected, at $9.63 billion, above the Street’s $9.49 billion estimate.

Dell Inc (DELL $13) held an analyst day where it said that it expects fiscal 2011 revenue to increase 14-19% and non-GAAP operating income to increase by 18-23%. In giving the outlook, the company cited a client refresh as well as an improvement in the global economy and increased IT spending. However, Dow Jones is reporting that management had cautious comments about demand in Europe, indicating that consumer spending is weakening, although corporate customers continue to buy. Shares were solidly lower.

Nike Inc. (NKE $70) reported fiscal 4Q EPS of $1.06, which matched the Reuters estimate, while revenues, which rose 8% year-over-year (y/y) to $5.1 billion, came in short of the Street’s $5.2 billion expectation. The company said fiscal 2010 was “tough” but it reported that worldwide futures orders for athletic footwear and apparel, scheduled for delivery from June through November 2010, rose 7% y/y to $8.8 billion. Shares were lower.

Bed Bath & Beyond Inc. (BBBY $39) reported fiscal 1Q EPS of $0.52, four cents above the consensus estimate of analysts, with revenues rising 13.5% y/y to $1.92 billion, just above the $1.89 billion that the Street was calling for. Same-store sales—sales at stores open at least a year—rose 8.4%, after falling 1.6% in the same period a year ago. However, shares were under pressure after the company issued 2Q EPS guidance that missed analysts’ expectations, with the company’s CEO saying on a conference call that persistently high unemployment and uncertainty in the economy could continue to pressure the consumer.

Lennar Corp. (LEN $15) posted fiscal 2Q EPS of $0.21, compared to flat earnings that analysts were forecasting, with revenues declining 9% y/y to $814.5 million, below the $857 million that the Street had anticipated. Also, the homebuilder said new orders fell 10% y/y and it continued to see a housing market that was trying to rebound, but as expected, this stabilization process was impacted by the expiration of the Federal homebuyer tax credit. Shares were lower.

Darden Restaurants Inc. (DRI $40) shares fell after the company reported 4Q EPS of $0.80, eight cents below the Street estimate, as same-restaurant sales declined 2.3% after posting an increase in the prior quarter. However, the owner of Olive Garden, Red Lobster and LongHorn Steakhouse restaurants projected same-store sales to rise 2-3% at its three largest brands for the 2011 fiscal year, after two consecutive years of declines, and boosted its quarterly dividend to $0.32 per share from $0.25 per share. In an interview on CNBC, the CEO said that despite pulling oysters from the menu, other Gulf seafood, such as grouper, snapper and shrimp, “aren’t yet affected.” He said that while the company could experience month-to-month “bumpiness” in results, they haven’t had a need for “deep discounting” to lure consumers.

ConAgra Foods Inc. (CAG $24) reported adjusted fiscal 4Q earnings of $0.39 per share, one penny below analysts’ forecasts, with revenues declining 5% y/y to $3.1 billion, also short of the $3.2 billion Street forecast. The company said its consumer foods segment, which accounted for 66% of total sales and includes brands such as Chef Boyardee, Healthy Choice, Banquet, and David Sunflower Seeds, posted a unit volume increase of 3% y/y after adjusting for an extra week in the year ago period. However, CAG’s commercial foods segment, which makes up the remainder of its total sales and includes seasonings and milled products sold to foodservice and commercial channels, experienced a profit decline of 26% y/y. CAG issued full-year EPS guidance that matched analysts’ forecasts. Shares were lower.

Durable goods orders decline by a smaller amount than forecasted, jobless claims fall

Durable goods orders (chart) fell 1.1% month-over-month (m/m) in May, a smaller decline than the forecast of 1.4%, and April was revised higher by 0.1% to 3.0%. The headline number was influenced by a 6.9% decline in transportation equipment as nondefense aircraft and parts fell 29.6%. Ex-transportation, orders rose 0.9%, just shy of the expectation for a 1.0% increase, increasing for the third time in four months. Orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, rose 2.1% in May, and are up 15.5% year-over-year.

Economic recovery began with the renewal of inventory building, after businesses allowed inventories to plunge by record amounts in response to the crisis, and as a result, production fell well behind demand. As a result, and while final 1Q Gross Domestic Product figures come out tomorrow, inventory growth added 3.8% to GDP in 4Q and 1.65% in 1Q. Inventory building can continue to contribute to growth, although future contributions will likely be smaller.

Meanwhile, weekly initial jobless claims dropped 19,000 to 457,000, versus last week's figure which was upwardly revised by 4,000 to 476,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 463,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 1,500 to 462,750, and continuing claims fell by 45,000 to 4,548,000, compared to the drop to 4,550,000 that was anticipated.

Treasuries erased early gains and were mixed, as the yield curve steepened. The yield on the 2-year note fell 1 bp to 0.66%, while the yield on the 10-year note gained 1 bp to 3.12%, and the 30-year bond yield increased 3 bps to 4.09%.

While the Fed reiterated the need for low rates for an “extended period” amid global uncertainty, the bearish housing data this week and downgrade in the assessment of the economy by the Fed has investors taking risk off the table, fleeing to the relative safety of Treasuries amid an environment that continues to be characterized by the absence of inflationary pressures. Yesterday the Federal Reserve dialed back its language about the recovery’s pace for the first time since recovery unfolded, and noted a change in financial market conditions from “supportive of economic growth,” to “less supportive of economic growth,” noting the recent European crisis, saying this reflects “developments abroad.” Also, the Fed said that bank lending had continued to contract in recent months and that underlying inflation has “trended lower.”

Euro debt worries continue and Australia appoints a change in guard

Euro-area debt fears resurfaced, exacerbated by a record high in the rate of credit default swaps—a measure of the cost of insuring a nation’s debt against default—in Greece, which also pressured other debt-laden nations such as Spain and Portugal.

A political shake up in resource-rich nation of Australia dominated Asia/Pacific news, after Australia appointed its first woman Prime Minister, Julia Gillard today, replacing Prime Minister Kevin Rudd who was forced to step down amid poor opinion polls ahead of a fall election, due partly to his decision to impose a hefty tax on the mining industry. Mining firms posted gains as Gillard has noted the need to reach a consensus and negotiate the industry tax, although the tax likely has the support of Gillard’s deputy, Wayne Swan, who was the Treasurer when the tax proposal was crafted. Elsewhere, Taiwan unexpectedly had its first rate hike since 2008, increasing the benchmark rate to 1.375% from 1.25%, Hong Kong’s trade deficit narrowed by a larger amount than forecasted by economists, and New Zealand’s 1Q GDP rose 0.6% quarter-over-quarter (q/q) to match expectations.

On the economic front, euro-zone industrial new orders rose 0.9% month-over-month (m/m) in April, but came in short of the 1.6% advance that economists had expected, while French consumer spending rose more that forecasted. Additionally, data out of Italy was mixed, with the nation reporting a larger-than-expected drop in retail sales, while separately, the country’s unemployment rate increased by a smaller amount than anticipated. Moreover, France reported that total jobseekers rose more than expected.

The Brazil unemployment rate unexpectedly increased to 7.5% in May from 7.3% in April, while the forecast was for the rate to decline to 7.1%, as officials have noted labor shortages in some industries. On June 17, the Brazil Finance Minister said that the labor market remains tight overall amid strong economic growth, and that the bank is unlikely to slow its cycle of rate increases, after implementing a second rate hike on the 9th of June.

Readings on consumer sentiment and spending and GDP due up

As previously discussed, 1Q Gross Domestic Product will be released tomorrow, expected to be unchanged from the second reading, wherein 3.0% growth was reported, a decline from the 5.6% rate in 4Q, while personal consumption gained 3.5%, accelerating from the 4Q pace of 1.6%, and real final sales, which exclude changes in inventory, were 1.4% higher, versus 1.7% in 4Q. Inflation was benign, as the GDP Price Index rose 1.0%, and the core PCE Index, which excludes food and energy, increased 0.6%.

Other releases on tomorrow’s US economic calendar will include May’s personal income and spending, which are expected to increase 0.5% and 0.2% respectively and the final reading on the University of Michigan Consumer Sentiment Index for June, expected to remain at 75.5, the highest reading since January 2008, increasing from a 73.6 reading in May.

The international economic calendar will include the German import price index, Japan’s CPI and the German IFO business climate survey by industry.