Evening Market Update

Stocks Inch Higher

Equities managed to post a small gain today, overcoming early morning profit-taking following yesterday’s strong showing. Trading was light, and the sole economic release was a rise in mortgage applications driven by refinance volume, and Treasuries were mixed. In earnings news, shares of Target were boosted by upbeat guidance despite posting inline earnings and a revenue miss, while Deere & Co beat estimates but gave downbeat comments on Europe, and BJ Wholesale’s and Vestas Wind Systems both issued results that were lower than expected. Elsewhere, Analog Devices beat earnings estimates, and BHP Billiton took its $39 billion takeover for Potash Corp of Saskatchewan Inc hostile. Just before the close of trading, General Motors filed its IPO with the SEC.

The Dow Jones Industrial Average gained 10 points (0.1%) to 10,416, the S&P 500 Index rose 2 points (0.2%) to 1,094, and the Nasdaq Composite advanced 6 points (0.3%) to 2,216. In light volume, 922 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil lost $0.35 to $75.42 per barrel, while wholesale gasoline was $0.01 higher at $1.96 per gallon, and the Bloomberg gold spot price gained $4.10 to $1,228.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 82.25.

Target Corp. (TGT $52) reported 2Q EPS of $0.92, inline with the Reuters estimate, as revenues increased 3.1% year-over-year (y/y) to $15.5 billion, just shy of the $15.6 billion that analysts were expecting. Same-store sales—sales at stores open at least a year—increased 1.7% y/y. TGT said growth in guest traffic and apparel sales “remained robust” and it continued to exercise thoughtful control of expenses. The company added that its credit card segment also enjoyed very strong results. “Regardless of the pace of recovery, we are well-positioned to continue to gain profitable market share,” TGT’s CEO said. However, shares overcame an early loss and were higher after it offered an upbeat outlook for same-store sales on a conference call with analysts, adding that 3Q and 4Q Street EPS estimates are “reasonable.” Analysts polled by Reuters expected TGT to post 3Q and 4Q EPS of $0.68 and $1.37, respectively.

Deere & Co. (DE $66) reported fiscal 3Q EPS of $1.44, well above the $1.24 that the Street had forecasted, with revenues increasing 16% y/y to $6.8 billion, above the consensus forecast of $6.5 billion. The farm and construction equipment company said while it benefitted from positive conditions in the US farm sector, particularly in terms of demand for large equipment, “European markets are down sharply.” Also, DE said demand for construction and forestry equipment is improved from last year but still remains “far below normal levels.” The company issued 4Q earnings guidance that matched expectations. DE shares fell.

In follow-up M&A news, BHP Billiton (BHP $68) announced that after its near $39 billion, $130 per share cash bid to acquire Potash Corp. of Saskatchewan Inc. (POT $148) was rejected by the agriculture firm’s Board of Directors, it will take its proposal directly to the shareholders of POT. By campaigning for votes of the shareholders, BHP’s offer is considered hostile and the company said, “We firmly believe that Potash Corp. shareholders will find the certainty of a cash offer, at a premium of 32% to the 30-trading day period average, very attractive and we have therefore decided to make this offer directly to those shareholders.” POT has not commented on the hostile bid, but yesterday called the offer price “grossly inadequate.” POT also adopted a shareholder rights plan—also known as a poison pill—to try to thwart an unwanted takeover attempt in which its shareholders can purchase POT shares at a substantial discount following the acquisition of more than 20% of the outstanding stocks by any person. BHP was under some pressure, while POT traded higher.

In other earnings news, BJ’s Wholesale Club Inc. (BJ $42) traded solidly lower after reporting 2Q earnings of $0.67 per share, short of the $0.73 that analysts were anticipating, with revenues increasing 8.6% y/y to $2.7 billion, roughly inline with the Street’s forecast. Same-store sales rose 4.4% y/y including gasoline sales, while excluding gas sales, the gain was 2.9%. BJ lowered its full-year outlook.

Elsewhere, Analog Devices Inc. (ADI $30) achieved fiscal 3Q profits of $0.65 per share, five cents above the Street’s expectations, with revenues jumping 46% y/y to $720 million, topping the $707 million that analysts were anticipating. The analog chipmaker said it saw quarter-over-quarter (q/q) revenue growth of 8% with the largest increases occurring in the industrial and communications infrastructure markets. ADI offered 4Q guidance that exceeded estimates and shares rose.

Shares of European maker of wind turbines, Vestas Wind Systems (VWDRY $14), were down over 20% after it slashed its outlook for 2010, as “expected, but still not concluded orders for delivery to the USA, Spain and Germany will now take place at such a late date in 2010 that they will not be recognized as income this year.”

Shortly before the close, General Motors filed the preliminary prospectus for its initial public offering (IPO), wherein none of the proceeds from the offering will accrue to the company, but likely reduce the nearly 61% stake by the US Treasury, as well as other outside shareholders. The company will offer both common and preferred shares, and CNBC reported that a November pricing is anticipated.

Mortgage applications jump as refis soar

In a light day on the US economic front, the US MBA Mortgage Application Index jumped 13.0% last week, after the index that can be quite volatile on a week-to-week basis, moved a modest 0.6% higher in the previous week. The gain came as the Refinance Index surged 17.1%, more than offsetting a 3.4% drop in the Purchase Index. The increase in the overall index came amid a 2 basis-point rise in the average 30-year mortgage rate to 4.60%, just off of the record low of 4.58%. Treasuries were mixed, as the yield on the two-year note was flat at 0.50%, the yield on the 10-year note was unchanged at 2.64% and the yield on the 30-year bond was 3 bps lower at 3.74%.

International economic data light

International economic news was relatively light, although the release of the minutes from the Bank of England’s (BoE) last meeting did garner attention. Policymakers at the last BoE meeting voted 8-1 in favor of leaving its benchmark interest rate unchanged at a record low of 0.5% earlier this month, with the lone dissenting vote being in favor of an increase in the rate. In discussing the decision, the BoE said that “The weight of evidence continued to suggest that the margin of spare capacity was likely to bear down on inflation.” Recent increases in consumer prices were described in a letter yesterday by BoE Governor Mervyn King as “temporary” due to prices of commodities and VAT increases. In his third straight dissent, Andrew Sentance said that economic conditions had “improved over the past 12 months and the inflation outlook had shifted sufficiently to justify beginning to raise rates gradually,” and that second quarter data “suggested the recovery was gathering momentum and there was evidence that firms had found it easier to pass through price increases.”

In other news, euro-zone construction output increased 2.7% month-over-month (m/m) in June, after falling a favorably revised 0.7% in May. In Asian economic news, Australia’s Leading Index was flat m/m in June and Japan’s Leading Index was revised higher for June.

Few releases on tap tomorrow, but jobs data will be scrutinized

Tomorrow’s US economic calendar yields the weekly initial jobless claims data, forecasted to decline to 478,000 from 484,000 the week prior. Claims data in July were distorted by seasonal factory shutdowns that did not occur this year, but the increase in three of the last four weeks combined with weaker job gains in July in the Labor Report have added to the bear story regarding the possibility of a double-dip.

After trading begins, the Conference Board will release the Index of Leading Economic Indicators (LEI) for July, expected to rise 0.1% after declining 0.2% in June, and the Philly Fed Manufacturing Index will be released, expected to rise to 7.2 in August from 5.1 in July. The Philly Fed report is the second regional report on manufacturing activity for August. In Monday’s release, 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. Readings above zero suggest conditions are expanding. In the Empire report, new orders and shipments fell sharply to levels below the zero mark, but the employment component of the report rose solidly, moving further into a level depicting expansion.

International releases tomorrow include Japanese department store sales and machine tool orders, German producer prices, UK retail sales, Canada’s leading indicator and wholesale sales, as well as Indian wholesale prices.

The UK FTSE 100 Index was down 0.9%, France’s CAC-40 Index finished 0.4% lower, and Germany’s DAX Index was off 0.3%, while Switzerland’s Swiss Market Index gained 0.1%.