Evening Market Update

Stocks See Modest Losses Following Yesterday’s Sharp Fall

After the steep drop seen yesterday, stocks moved lower again today, as an unexpected increase in jobless claims was added to the recent string of disappointing data that has soured the outlook for economic recovery. Sentiment was also hurt by a revenue miss by Dow member Cisco Systems, and commentary from the company’s CEO John Chambers, who described the current environment as “unusually uncertain.” Elsewhere on the earnings front, Kohl’s beat the Street’s EPS estimate, but gave a weak 3Q outlook, Advance Auto Parts posted an upbeat profit report and raised full year guidance, while Estee Lauder Companies missed earnings estimates but managed solid revenue growth. Rounding out the equity news was General Motors, which posted a return to profit compared to last year, and is also rumored to be close to filing its IPO request, while CEO Ed Whitacre announced that he will step down as CEO effective September 1st. Treasuries finished the day lower, as the only other major release on the domestic economic docket was a report that showed import prices rose by a smaller amount than forecasted.

The Dow Jones Industrial Average fell 59 points (0.6%) to 10,320, the S&P 500 Index was 6 points (0.5%) lower at 1,084, and the Nasdaq Composite declined 18 points (0.8%) to 2,190. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $2.17 to $75.85 per barrel, wholesale gasoline lost $0.04 to $1.96 per gallon, while the Bloomberg gold spot price gained $16.95 to $1,215.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.1% to 82.61.

Dow member Cisco Systems Inc. (CSCO $21) reported fiscal 4Q EPS ex-items of $0.43, one penny above the Reuters estimate, but revenues, which although rose 27% year-over-year (y/y) to $10.8 billion, came up just shy of the $10.9 billion that the Street had expected. The world’s largest maker of computer networking equipment said whether the global economy continues to show mixed signals or not, it is confident in its strategy and will continue to aggressively move into new areas where the network is becoming the platform, and where its customers want it to invest and innovate.

However, CSCO’s CEO John Chambers issued some cautious commentary in a conference call with analysts, saying that the current environment is “unusually uncertain,” as customers have exercised “an unusual amount of conservatism and caution,” per Dow Jones Newswires. Chambers added that he doesn’t expect a double-dip recession but is seeing mixed signals in the market and from customers’ expectations. Shares were down sharply.

Kohl’s Corp. (KSS $46) reported 2Q EPS of $0.84, two pennies above the Street’s expectation, with revenues rising 7.7% y/y to $4.1 billion, roughly inline with the consensus estimate, and same-store sales—sales at stores open at least a year—rose 4.6% y/y. KSS said it continued to gain market share as reflected in its same-store and total sales results, and along with strong inventory management, allowed it to continue to increase its gross margin rate. On a conference call with analysts, the company said year-to-date, transactions per store are up over 8%, driven by strong aggressive marketing tactics that it wants to continue because “we do see a cautious consumer.” But shares traded lower after KSS issued 3Q EPS guidance that missed analysts’ expectations.

General Motors reported $1.3 billion in 2Q earnings, compared to the near $13 billion shortfall it posted last year, with revenues jumping 43% y/y to $33.2 billion. Also, Reuters reported that the automaker, which recently emerged from bankruptcy, has secured a $5 billion credit facility, clearing the way for an IPO, citing people familiar with the matter. Also, CNBC reported that the company is expected to file for the IPO on Friday. GM refused to comment on the IPO reports, simply stating “we’ll look at an IPO when the markets are right and the company is right.” Separately, on a conference call with analysts following the results, the company’s CEO Ed Whitacre announced that he will step down on September 1st, to be replaced by Dan Akerson, who has been on the GM board for over a year and is managing director and head of global buyout for private equity firm Carlyle Group.

Advance Auto Parts Inc. (AAP $55) announced 2Q EPS of $1.16, versus the $1.03 that analysts were anticipating, with revenues increasing 7% y/y to $1.4 billion, roughly matching expectations. The auto parts retailer said its same-store sales rose 5.8% y/y amid the “resurgence” of do-it-yourself business, and it is encouraged by its good start to 3Q and it is upbeat as it looks to the second-half of 2010. AAP raised its full-year EPS guidance and shares finished nicely higher.

Shares of Estee Lauder Companies Inc. (EL $59) were lower after the beauty-products company reported 4Q earnings of $0.29, one cent shy of analysts’ estimates. Net sales increased 9% y/y to $1.84 billion, led by 12% growth in the skin-care segment and 10% growth in makeup, while fragrance sales declined 0.6% and the company’s international segment continues to be a “key area of strategic focus.” EL also issued weak full year profit guidance.

Jobless claims tick higher, import prices rise less than expected

Weekly initial jobless claims rose by 2,000 to 484,000, versus last week's figure which was upwardly revised by 3,000 to 482,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 465,000. The four-week moving average, considered a smoother look at the trend in claims, jumped by 14,250 to 473,500, while continuing claims tumbled by 118,000 to 4,452,000, compared to the 4,535,000 that was anticipated by economists.

Elsewhere, the Import Price Index rose 0.2% month-over-month (m/m) for July, compared to the expectation of economists, which called for the index to increase by 0.3%. Year-over-year, import prices are higher by 4.9%, versus the 5.4% forecast of economists.

Treasuries finished modestly lower, moving back below the flatline after briefly paring losses following the jobs and import price reports, giving back some of yesterday’s gains that came from some flight-to-safety buying on a slew of lackluster global economic data. The yield on the two-year note rose 3 bps to 0.55%, the yield on the 10-year note gained 3 bps to 2.75% and the yield on the 30-year bond was 2 bps higher at 3.94%. A bulk of the disappointing data came out of Asia, with reports showing China’s economy slowed, while a much smaller-than-forecasted increase in Japanese machine orders propelled the yen to a fifteen-year high versus the US dollar. Also, yesterday’s delayed negative reaction to Tuesday’s monetary policy announcement from the US Federal Reserve prompted some of the risk aversion as it downgraded its economic outlook and announced that it will opt to keep its balance sheet constant by reinvesting proceeds from principal payments from agency and agency mortgage-backed securities into longer-term Treasuries. Moreover, on the economy, the Fed said it continues to anticipate a gradual recovery, but that the pace “is likely to be more modest in the near term than had been anticipated.”

Euro-zone and Japanese industrial production fall

In European news, the economic uneasiness that ramped up yesterday was kept on the front burner, as a report showed euro-zone industrial production unexpectedly declined, dipping 0.1% m/m in June, after rising an upwardly revised 1.1% in May, and compared to the 0.6% increase that economists expected. However, the European Central Bank released its August monthly report, where it reiterated that interest rates remain appropriate, inflation remains moderate, and the available data for 3Q are “better-than-expected.” Other reports rounding out the euro-area economic docket were a larger-than-expected contraction in 2Q GDP in Greece, a widening in Italy’s trade deficit, and a smaller-than-anticipated unemployment rate in Sweden. Finally, there were several reports on inflation, with consumer prices in Spain and Sweden declining m/m in July, while Italy’s CPI rose.

In Asia/Pacific news, the Japanese yen took center stage as it found pressure on increased speculation that the Bank of Japan may be close to intervening to stop the recent surge in the yen that has crushed the outlook for profits of companies that rely heavily on sales in the US. The expectations ramped up as Japanese officials offered rhetoric about the negative impact of strong gains in the Asian currency, with Japan’s Finance Minister Noda saying it will monitor economic conditions carefully and respond appropriately, but offering no details of any action plan, while the Bank of Japan Governor Shirakawa said the central bank is closely watching “substantial fluctuations” in foreign exchange rates. Additionally, the Japanese Ministry of Economy, Trade and Industry said it will conduct a survey of companies pertaining to the effects on business of the stronger yen and results are expected to be reported back at the end of the month, per Bloomberg. Adding to the string of data pointing to weakness in the yen, a report showed Japanese industrial production fell 1.1% m/m in June, after falling 1.5% in the prior reading, and a report on Japanese consumer confidence unexpectedly fell in July.

Elsewhere in the region, a report out of Australia showed the nation’s unemployment rate unexpectedly rose to 5.3% in July, from the 5.1% in June, where it was expected to remain. Although Australia’s employment change increased more than anticipated, the advance was attributed to a rise in part-time employment as full-time employment fell. Moreover, a separate report showed consumer inflation expectations in Australia declined from 3.3% in July to 2.8% in August. In other economic news in Asia, South Korea’s central bank kept its benchmark interest rate unchanged at 2.25%, as expected, after its unexpected hike last month. Rounding out the heavy economic calendar, India’s industrial production slowed by a larger-than-forecasted amount.

CPI and retail sales headline tomorrow’s docket

Tomorrow, the economic calendar will yield a couple key releases pertaining to the consumer, with a report depicting pricing pressures that they face and a separate read on the propensity for consumers to spend. The Consumer Price Index is expected to increase by 0.2% month-over-month (m/m) in July, while excluding food and energy, the core rate is forecasted to tick 0.1% higher. On a year-over-year basis the headline and core rates are expected to show increases of 1.2% and 0.9%, respectively. Inflation, which is one side of the Federal Reserve’s dual mandate and is clearly on the back burner in the minds of the Fed policy makers as they continue to reiterate that inflation is likely to be subdued for some time. In fact, the subject of deflation was broached at the Federal Open Market Committee’s (FOMC) June policy meeting and the minutes from Tuesday’s meeting will likely show the subject come up again. Consumers—which make up the lion’s share of the economy—are not being threatened by increasing prices and the lack of inflation expectations—and recent increase in deflationary rhetoric—may be adding complacency into the psyche of consumers, teaming up with the pessimism toward the labor market and the concerns about a double-dip recession. Recently we have seen cautious outlooks emerge in corporate commentary, such as in early 2Q earnings reports out of the consumer sector and last week’s same-store sales releases.

However, tomorrow’s retail sales report is forecasted to show a 0.5% increase month-over-month (m/m) in July and stripping out auto sales, 0.3% growth is anticipated, snapping the string of losses that were posted in May and June. The likelihood of an upside surprise in retail sales is limited by the aforementioned headwinds that are stymieing consumer sentiment and as back-to-school shopping season has yet to kick into high gear.

Other releases due out tomorrow include the University of Michigan Consumer Sentiment Index for August, which is expected to increase to 69.0 from a previous reading of 67.8, while economists will be looking for business inventories to increase 0.2% in June, after rising 0.1% in May.

The international economic front will be busy as well, as Germany, France and euro-zone will all release initial 2Q GDP readings. Economists are looking for euro-zone growth of 0.7%, while Germany and France are predicted to come in at 1.3% and 0.5%, respectively. The euro-zone will also release its trade balance, while France will report CPI.