Evening Market Update

Markets Start the Week on Uneven Footing

After another rocky day for the markets in the midst of disappointing economic data, stocks finished mixed with the Nasdaq posting a modest gain amid strength in the technology sector. The lackluster sentiment came courtesy of a much smaller-than-forecasted reading of Japan’s 2Q GDP, a manufacturing activity report in the New York region showing growth that was less than forecasts, and an unexpected drop in homebuilder confidence. On the equity front, Lowe’s Companies notched a gain despite missing analysts’ profit and revenues forecasts, Dell announced it has agreed to acquire storage solutions firm 3Par for $1.2 billion, while food distributor Sysco Corporation posted disappointing profits, and for-profit colleges came under pressure following data released from the Department of Education. Treasuries ended the day higher following the below-par economic reports.

The Dow Jones Industrial Average fell 1 point (0.01%) to 10,302, the S&P 500 Index was unchanged at 1,079, and the Nasdaq Composite gained 8 points (0.4%) to 2,182. In light volume, 789 million shares were traded on the NYSE and 1.6 billion shares were traded on the Nasdaq. Crude oil fell $0.15 to $75.24 per barrel, wholesale gasoline lost $0.02 to $1.92 per gallon, while the Bloomberg gold spot price gained $8.80 to $1,224.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.5% to 82.49.

Lowe’s Companies Inc. (LOW $20) reported 2Q EPS of $0.58, one penny short of the Reuters estimate, with revenues also coming in below expectations, rising 3.7% year-over-year (y/y) to $14.4 billion, compared to the $14.5 billion that the Street was looking for. Same-store sales—sales at stores open at least a year—increased 1.6% y/y. The world’s number-two home improvement retailer said, despite economic uncertainty, its prudent expense management yielded solid results and, “with limited visibility into near-term demand,” it continues to focus on operational efficiency to create shareholder value. LOW narrowed its full-year EPS outlook, while lowering its full-year revenue forecast. Shares were higher despite the softer-than-forecasted results, suggesting that traders may have expected worse numbers given the lackluster reports out of the retail sector recently.

Tomorrow, the world’s largest home improvement retailer and Dow member Home Depot Inc. (HD $28) will report its 2Q results, and is forecasted to post EPS of $0.70 on revenues of $19.6 billion. Also, fellow Dow component Wal-Mart Stores Inc. (WMT $510 is expected to report results on Tuesday, and is anticipated to achieve EPS of $0.96 on revenues of $105 billion. On Wednesday, Target Corp. (TGT $51) will release its profit report, and is expected to announce revenues of $19.6 billion, and EPS of $0.70.

In other earnings news, Sysco Corp. (SYY $29) was under pressure after the food distributor reported adjusted fiscal 4Q EPS of $0.53, short of the $0.58 that analysts were expecting, but revenues increased 13.9% y/y to $10.3 billion, above the $10.0 billion that the Street was forecasting. The SYY said volume trends improved, aided by improved productivity, but it said the extent, pace and consistency of the economic recovery are not clear.

In M&A news, Dell Inc. (DELL $12) announced that it has signed an agreement to acquire storage solutions firm 3Par Inc. (PAR $18) for $1.15 billion in cash. DELL will commence a tender offer to acquire all of the outstanding common stock of PAR for $18 per share. DELL said that the deal extends its storage capabilities, enabling it to help customers capitalize on the “Virtual Era,” with a goal of reducing overall data management costs by 50%. DELL finished lower, while PAR was up over 80%.

For-profit colleges were under pressure amid data released by the Department of Education (DOE) that showed estimated loan repayment rates for the nation’s institutions, and some colleges came up short of the government’s proposed hurdle repayment rate by graduates. The DOE is proposing—as way of measuring how well for-profit colleges prepare students for gainful employment—that institutions that have a repayment rate above 45% from graduates will continue to be eligible for government-backed student loans, while institutions that are below the government’s hurdle could find tougher regulation and possible disqualification from the government’s loan program, which account for the lion’s share of the schools’ revenues.

Shares of Strayer Education Inc. (STRA $163) were down sharply after the DOE’s data showed its rate fell bellow the 45% level, and it said its internal data and analysis are “significantly at odds” with the government’s figures. STRA said it is respectfully requesting an immediate meeting with the government in its efforts to de-conflict this data. Other firms were down sharply as only four institutions were found to have repayment rates above the 45% watermark, according to the Associated Press. However, shares of Apollo Group Inc. (APOL $41), which is the parent of the University of Phoenix, were solidly higher after the company was reported to have a repayment rate of 44.2%, which was higher than most analysts had expected, per Dow Jones Newswires.

NY manufacturing rises but misses forecasts, homebuilder sentiment surprisingly slips

The Empire Manufacturing Index, a measure of manufacturing in the New York region, rose in August to a level of 7.10, but was below the estimates of economists surveyed by Bloomberg, which expected an increase to 8.00, from the previous month’s level of 5.08. But the index remains above the level of zero that suggests conditions are neither contracting nor expanding. New orders and shipments fell solidly to levels below the zero mark, but the number of employees component of the report rose solidly, moving further into a level depicting expansion. The report is the first major piece of data looking at manufacturing conditions in August, and later this week, the Philly Fed Manufacturing Index will be released, expected to increase from 5.1 in July to 7.0 in the current month, providing further insight into the health of the sector.

In other economic news, the NAHB Housing Market Index, a gauge of homebuilder sentiment, unexpectedly fell, dropping to 13 in August, from a reading of 15 last month, and compared to the 15 level that economists had expected. Any reading below a level of 50 indicates more respondents feel conditions are poor and the index sits at the lowest level since March 2009. The report showed homebuilders’ sentiment toward current and future sales of single-family homes worsened, while the assessment of traffic—prospective buyers—was unchanged.

Treasuries finished higher following the manufacturing and housing reports, with the yield on the 10-year note falling to a 17-month low. The yield on the two-year note lost 4 bps to 0.50%, the yield on the 10-year note declined 10 bps to 2.58% and the yield on the 30-year bond was 14 bps lower at 3.72%.

Japan shows meager growth

In Asia/Pacific economic news, Japan’s 2Q GDP increased 0.1% quarter-over-quarter (q/q) after expanding by a slightly downwardly revised 1.1% in 1Q, and short of the 0.6% gain that was anticipated by economists. On an annualized basis, the Japanese economy expanded by 0.4%, slowing from the 4.4% increase seen in the prior quarter, and compared to the 2.3% rise that was anticipated. Elsewhere, the Hong Kong government implemented tougher mortgage lending rules and said it will increase the supply of land in an effort to cool skyrocketing housing prices, while Australian new motor vehicle sales fell 2.6% m/m in July.

The European economic calendar was relatively light, with a report showing UK home prices declined 4.1% m/m in August, the largest drop in more than two years and to a level not seen since January. Meanwhile, the euro-zone Consumer Price Index fell by a smaller-than-expected 0.3% m/m in July.

Plethora of US data tomorrow

Tomorrow’s US economic releases will begin with the Producer Price Index (PPI), expected to show prices at the wholesale level rose 0.2% month-over-month (m/m) in July, on the heels of a 0.5% decrease in June, while the core rate, which excludes food and energy, is expected to rise 0.2% after increasing a mere 0.1% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a 4.2% rise in July versus 2.8% the prior month on a headline basis, and a 1.3% increase at the core level, up from a 1.1% increase in June.

Additionally, a reading on industrial production will be released, expected to grow 0.5% in July after rising 0.1% in June, and capacity utilization is forecasted to increase to 74.6% from 74.1% in June.

Rounding out the busy day is the report on housing starts for July, expected to show an increase of 2.0% m/m to an annual rate of 560,000 units, after falling the two prior months, by 5.0% in June and plunging 14.9% in May. Meanwhile, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to fall 0.9% m/m in July to 578,000 units after rising 2.1% in June. The increase in permits in June was driven by a 20% increase in multi-family applications, while single-family permits fell 3.4%, to the lowest level since April 2009.

The international economic calendar will include: the eurozone current account, UK CPI and retail prices, the German ZEW Economic Sentiment survey, and manufacturing numbers out of Canada.