Evening Market Update

Stocks Churn Higher on Positive Jobs & Service Sector Growth

The equity markets notched modest gains today on mostly positive corporate earnings, as well as encouraging reports on private sector hiring and the services industry. Volume was relatively light and trading was range-bound, as traders appear to be looking ahead to Friday’s labor report for guidance. A larger-than-forecasted rise in the ADP Employment Change Report provided some hope for Friday’s data, while sentiment was also helped by an unexpected increase in the ISM Non-Manufacturing Index and an increase in US MBA Mortgage Applications. On the earnings front, Time Warner, Priceline.com, Polo Ralph Lauren and Electronic Arts all beat the Street’s profit forecasts, while Pitney Bowes and Owens Corning failed to meet analysts’ expectations. In other equity news, CNBC is reporting that Goldman Sachs is considering a spin-off of its proprietary trading unit and Barnes & Noble announced that it intends to evaluate “strategic alternatives,” including the possible sale of the company. Treasuries finished the day lower.

The Dow Jones Industrial Average gained 44 points (0.4%) to close at 10,680, while the S&P 500 Index rose 7 points (0.6%) to finish at 1,127, and the Nasdaq Composite increased 20 points (0.9%) to 2,304. In moderately light volume, 975 million shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $0.09 to $82.46 per barrel, wholesale gasoline was $0.01 lower at $2.18 per gallon, and the Bloomberg gold spot price gained $7.90 to $1,194.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% higher at 80.93.

Time Warner Inc. (TWX $32) reported adjusted 2Q EPS of $0.50, five cents above the Reuters estimate, with revenues rising 8% year-over-year (y/y) to $6.4 billion, above the $6.2 billion that analysts were expecting. TWX said its advertising revenue grew 11% y/y, driven by growth at Turner Broadcasting and Time Inc. TWX raised its full-year EPS guidance. Shares were higher.

Electronic Arts Inc. (ERTS $17) posted a smaller-than-forecasted fiscal 1Q loss ex-items of $0.24 per share, compared to the $0.35 shortfall that the Street was looking for, and revenues, even though falling 34% y/y to $539 million, exceeded the $502 million expectation. ERTS reaffirmed its full-year guidance, but issued a 2Q EPS outlook that came in below the Street’s forecast. Shares traded solidly higher.

Priceline.com Inc. (PCLN $281) was more than 20% higher after the online travel booking firm posted adjusted 2Q EPS of $3.09, well above the $2.65 that analysts were expecting, with revenues increasing 27% y/y to $767 million, also besting the Street’s forecast of $734 million. The company said its performance was once again driven by strong growth in its global hotel reservations, as it achieved 48% y/y growth in hotel room nights booked. PCLN also issued 3Q guidance that exceeded analysts’ expectations.

Polo Ralph Lauren Corp. (RL $85) achieved fiscal 1Q earnings of $1.21 per share, easily exceeding the $0.89 that analysts were forecasting, with revenues increasing 13% y/y to $1.2 billion, just above the $1.1 billion that was anticipated. The clothing company said it had broad-based strength across all regions, product categories and channels, but global market conditions remain uncertain. The company’s wholesale segment sales increased 11% and its retail segment sales increased 16%. RL moved solidly higher on the results and after the company increased its full-year profit outlook.

Shares of Pitney Bowes Inc. (PBI $21) fell over 15% after the mail and document-management company announced 2Q EPS of $0.48, far below analysts’ estimates of $0.57 per share, while revenue of $1.3 billion was mostly inline with expectations. The company said business conditions were “weaker than expected” and experienced a decline in activity levels in the latter part of the quarter, after seeing signs of stabilization earlier this year. PBI also cut its 2010 earnings target by 20 cents from $2.30 to $2.10 and lowered revenue estimates.

Owens Corning (OC $29) reported 2Q EPS ex-items of $0.57, three cents short of the Street’s expectations, while revenue of $1.38 billion matched forecasts. OC was helped by higher demand for composite products, as well as materials used to make cars and airplanes. The company also announced a 10 million share stock buyback, which will be added to the prior plan under which 1.9 million shares can still be repurchased. Sales in the company’s largest segment, building-materials, rose 8% y/y, but profit figures were hurt by lower margins in the roofing business. Shares of OC traded lower.

Goldman Sachs Group Inc. (GS $156) is moving solidly to the upside following a report that the financial firm is considering a spinoff of at least a significant potion of its propriety-trading unit as early as this month, according to CNBC’s Kate Kelly. GS has not commented on the report.

Barnes & Noble Inc. (BKS $16) is nicely higher after it announced that it intends to evaluate “strategic alternatives,” including a possible sale of the company, in order to increase stockholder value. BKS said its Board came to this decision based on the price of its shares, which it believes are now “significantly undervalued.”

Expansion in service sector increases, private sector payrolls gain, mortgage apps rise

The ISM Non-Manufacturing Index unexpectedly increased in July, rising from 53.8 in June to 54.3, marking the seventh month above the 50.0 level that separates expansion from contraction, and compared to the forecasted level of 53.0 by economists surveyed by Bloomberg. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which on Monday, posted a smaller-than-expected decline to 55.5 in July from 56.2 in June.

The prices paid component dipped from 53.8 to 52.7, a slower deceleration than has been seen in the previous two months, possibly soothing some recent deflation concerns. The surprising increase came as the employment component moved back into expansionary territory, adding to the relative optimism ahead of Friday’s labor report and export orders also moved above the 50 mark, suggesting the recent weakness in the US dollar as the equity markets rallied in July helped improve foreign trade. However, the brightest spot of the underlying components of the report was the solid increase in new orders for the non-manufacturing sector, increasing from 54.4 to 56.7, snapping a three-month string of declines.

Meanwhile, the ADP Employment Change Report showed private sector payrolls increased by 42,000 jobs in July, compared to the forecast of economists, which called for a 30,000 increase, while June’s 13,000 job increase was upwardly revised to a 19,000 gain. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect a decrease of 63,000 in July, after falling 125,000 in June (economic calendar). Excluding government hiring, private sector payrolls are expected to increase 90,000, after expanding by 83,000 in June.

In other economic news, the US MBA Mortgage Application Index rose 1.3% last week, after the index that can be quite volatile on a week-to-week basis, declined 4.4% in the previous week. The gain came as the Refinance Index increased 1.3%, teaming up with a 1.5% gain in the Purchase Index. The increase in the overall index came amid a 9 basis-point decline in the average 30-year mortgage rate to 4.60%, moving close to the record low of 4.59% that was reached two weeks ago.

Treasuries finished lower after erasing early modest gains following the service sector and private sector jobs reports. The yield on the two-year note gained 3 bps to 0.56%, the yield on the 10-year note increased 4 bps to 2.95% and the yield on the 30-year bond rose 3 bps to 4.08%.

Mixed data out of Europe ahead of ECB and BOE monetary policy meetings

The economic front in Europe painted a mixed picture, as a report showed euro-zone retail sales rose 0.4% y/y in June, above the 0.1% increase that was expected, while compared to last month, sales were flat. Moreover, a report showed UK home prices unexpectedly rose in July, but several readings of euro-area service sector business activity were revised lower.

On the Asia/Pacific front, China issued a report that showed expansion in the region’s services PMI accelerated in July. Elsewhere, Australia’s trade surplus rose more than expected and home prices increased by a larger amount than forecasted. However, a separate report showed Australia’s service sector business activity deteriorated in July. Meanwhile, India’s sector business activity slowed, but remained at a level that depicted solid expansion.

The US economic calendar will be light tomorrow, as the only release will be weekly initial jobless claims, which are expected to decrease to 455,000 from a previous reading of 457,000. Additionally, same-store sales will be reported out of the retail sector.

On the international front, headlines will be dominated by monetary policy meetings of the European Central Bank and the Bank of England. Both central banks are expected to leave interest rates unchanged, at 1.00% and 0.50%, respectively. Other international reports will include German factory orders and Canadian building permits.