Evening Market Update

Glass Half-Full Sentiment Pushes Dow Below 10,000

Stocks ended lower, reversing an early gain that came amid strong earnings overseas, with US economic data providing diverse messages as initial weekly jobless claims declined but the one-month average increased, and a regional measure of manufacturing activity fell, leaving Treasuries mixed. In the latest round of M&A news, Dell boosted its bid for 3PAR to a level just above Dow component Hewlett-Packard Co’s offer, but HP countered with a $27 per share cash bid after the close of trading. Corporate results from consumer names Guess?, Rue 21, and TiVo resulted in stock losses as the companies issued disappointing forecasts. Elsewhere, Ford Motor and Toyota Motor are looking to India for growth.

The Dow Jones Industrial Average lost 74 points (0.7%) to 9,986, the S&P 500 Index fell 8 points (0.7%) to 1,047, and the Nasdaq Composite declined 23 points (1.1%) to 2,119. In low volume, 1.0 billion shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil gained $0.84 to $73.36 per barrel, wholesale gasoline was $0.04 higher at $1.87 per gallon, and the Bloomberg gold spot price fell $2.50 to $1,237.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.5% to 82.80.

The battle for data storage company 3PAR Inc (PAR $26) continues, as Dell Inc (DELL $12) raised its bid to $24.30 per share in cash, for a total enterprise value of $1.6 billion, slightly higher than Dow component Hewlett-Packard Co’s (HPQ $38), $24 per share offer, and Dell said that 3PAR’s board has accepted its increased offer, which expires at midnight, EDT, on September 20, 2010. Dell said the transaction is subject to government approvals and the satisfaction of other customary conditions, but is expected to close before the end of the year. Dell added that based on current estimates, the deal is forecast to be accretive to its non-GAAP earnings by its fiscal year 2012. Shares of all three companies ended lower.

After the close of trading, Hewlett-Packard announced a revised bid for 3PAR, of $27 per share in cash, saying if it is approved by 3PAR’s board, the company expects the transaction to close by the end of the calendar year.

Several consumer discretionary companies reported earnings, with Guess? Inc (GES $34) reporting 2Q earnings of $0.72 per share, four cents higher than the analyst estimate, aided by a rise in North America wholesale and Asia revenue, but shares were over 10% lower after the company reaffirmed full-year financial targets and gave 3Q guidance below the Street, saying that economic conditions remain uncertain in many markets and consumer behavior remained cautious, although its expansion efforts in Asia and Europe were paying off.

Teen retailer Rue 21 (RUE $21) reported 2Q EPS of $0.26, one cent higher than the Street, but revenues missed expectations as the company posted record merchandise margins due to lower merchandise costs and “not being overly promotional.” Additionally, the company forecast 3Q EPS of $0.25-0.27, versus analyst estimates of $0.28 in EPS, and its full-year forecast also missed expectations. Shares fell but came off the worse levels of the session.

Shares of TiVo Inc (TIVO $8) were lower after the company announced 2Q results of a loss of $0.13 per share on revenue of $51.6 million, and while revenues were inline and the loss was two cents better than forecasts, the company guided 3Q results below Street estimates. TiVo lost 125,000 subscribers during the quarter, as churn, the cancellation rate, rose to 1.9% per month.

The Indian car market is in headlines after Ford Motor Co. (F $11) said it will introduce eight new vehicles in India by 2015, and export its Figo small car from India to 50 new markets, and Toyota Motor Corp (TM $69) said it would start selling its Etios hatchback in the country next year, aiming to sell 70,000 of the cars in the first year, and said it is considering selling its Lexus brand in India. Shares of both companies reversed early gains and were lower.

Mixed messages from economic data

Weekly initial jobless claims fell by 31,000 to 473,000, versus last week's figure which was upwardly revised by 4,000 to 504,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 490,000. However, the four-week moving average, considered a smoother look at the trend in claims, increased by 3,250 to 486,750, while continuing claims fell by 62,000 to 4,456,000, compared to the 4,495,000 that was anticipated by economists.

The Kansas City Fed’s manufacturing index fell to a reading of zero from 14 in July, with zero marking the line between expansion and contraction. There was no estimate of the reading, and the survey does not generally attract much attention. However, amid slow trading and a nervous market, some aspects of the survey did add to the negative side of the ledger today, pushing stocks below the flatline at 11 a.m. EST, as shipments, new orders and employment components dropped into negative territory, and the order backlog index slipped from -2 to -16.

Treasuries reversed an early gain and were mixed. The yield on the two-year note was flat at 0.52%, the yield on the 10-year note fell 5 bps to 2.48%, and the 30-year bond lost 5 bps to 3.52%.

European economic news positive, yen talk dominates Asia

In European economic news, the leading index for the euro-zone rose 1.0% in July, after rising 0.6% in June, but the Conference Board said that despite the rise, the pace of economic activity “should ease in the short-term and pave the way for modest growth in 2011.” In separate releases, Germany’s consumer confidence rose and a measure of Italy’s consumer confidence fell. Additionally, Ireland attracted strong interest in two short-term debt auctions, selling 600 million euros ($763 million) at yields that were lower than sales just prior to yesterday’s credit rating cut by Standard & Poor’s.

Economic news from the Asia/Pacific region was scarce, although the Japanese yen continued to generate discussion after recently reaching a 15-year high, and the yen fell after Japan’s Prime Minister Kan said that the 15-year high in the yen versus the US dollar was making the economic situation “severe,” and the Asahi newspaper said the government may ask the Bank of Japan to ease monetary policy further as part of an economic stimulus package, without saying where it got the information. Elsewhere, Australia’s leading index gained 0.1% in June.

In Latin America, Brazil announced that its unemployment rate fell to a near-record low in July, and the 6.9% reading was better than the 7.0% estimate. Brazil’s economy has strengthened, but a survey of economists by Bloomberg published this week showed that they expect the central bank to remain on hold for the remainder of 2010 after consumer prices fell through mid-August to a rate that was below the government’s 4.5% target.

Downward revision expected to 2Q GDP growth in the US

Tomorrow’s second reading of 2Q gross domestic product (GDP) is expected to be revised much lower to 1.4% from the initial 2.4% reading, on a quarter-over-quarter annualized rate, after expanding by 3.7% in the first quarter. Personal consumption is expected to remain unrevised at 1.6%, down from the 1.9% pace in 1Q. No adjustments to inflation readings are expected, with the GDP Price Index anticipated to show a rise of 1.8%, while the core PCE Index, which excludes food and energy, is forecasted to increase 1.1%. The first reading was based on some data that was incomplete or subject to further revision. Since the initial reading, net trade data implied a decrease to growth, as imports (a subtraction from growth) outpaced exports, and inventory and construction data were worse than expected.

While downward revision to the GDP data will garner headlines, traders will be closely monitoring the speech from Fed Chair Ben Bernanke to be delivered at 10 a.m. EST at the annual economic symposium held in Jackson Hole, Wyoming. The topic is “The Economic Outlook and the Federal Reserve’s Policy Response,” and there is no Q&A expected.

The economic recovery is in doubt after a spate of negative releases over the past month, from retail sales, housing data, and as a measure of business spending fell in the durable goods orders release this week. While decelerating growth typically prompts calls for stimulus, negative sentiment rose after the Fed decided to maintain the size of its balance sheet at its August 10th meeting. The Fed faces a quandary, as the massive injection of money they provided in response to the recession has not provided the typical response in the economy, as money remains trapped in reserves on bank balance sheets, because banks are unwilling to grant loans to less-than-creditworthy borrowers and are uncertain about their revenue prospects amid new regulations and because heavily indebted consumers don’t want more debt. The Fed has a dual mandate of maximum employment and stable prices.

The other release on the US economic calendar tomorrow is the final version of the University of Michigan consumer sentiment survey for August, forecasted to remain at the 69.6 initially reported, which was an uptick from the 67.8 reading in July that was the lowest since November 2009.

International economic releases tomorrow include Japan’s unemployment rate, CPI, and household spending, while Germany will announce CPI, and the UK releases preliminary 2Q GDP.