Evening Market Update

Stocks Inch Higher Again to Close Short Week Out in the Green

The equity markets finished higher for the third-straight day on Friday to close out a holiday-shortened, low-volume week on a positive note. The lone report on the domestic economic calendar helped boost sentiment, as wholesale inventories saw a larger-than-forecasted increase in July. On the equity front, National Semiconductor Corp beat analysts' EPS expectations, but missed on the revenue front, while Texas Instruments Inc. raised its 3Q EPS guidance and Lululemon Athletica Inc. beat the Street's top- and bottom-line estimates. Elsewhere, shares of PG&E Corp. fell after a natural gas pipeline owned by the company exploded, killing six people and causing extensive damage. Treasuries finished the day lower.

The Dow Jones Industrial Average moved 48 points (0.5%) higher to 10,463, the S&P 500 Index gained 5 points (0.5%) to 1,110, while the Nasdaq Composite advanced 6 points (0.3%) to 2,242. In light volume, 755 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil rose $2.27 to $76.52 per barrel, wholesale gasoline increased $0.04 to $1.97 per gallon, and the Bloomberg gold spot price gained $2.18 to $1,245.83 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was flat at 82.73. For the week, including dividends, the DJIA increased 0.2%, the S&P 500 Index gained 0.5%, and the Nasdaq Composite rose 0.5%.

National Semiconductor Corp. (NSM $12) reported fiscal 1Q EPS of $0.36, two cents above the Reuters estimate, but revenues, which rose 31% year-over-year (y/y) to $412 million, came up short of the $415 million that analysts had expected. The company said it saw sequential sales growth due to demand for wireless handset and industrial markets-two of the largest markets served by NSM-but in the near term, slower growth in its end markets and distribution channel, along with some likely inventory reduction, will mute the seasonal growth that it would normally see during this time of year. NSM offered 2Q revenue guidance that came in below the Street's estimates. NSM was solidly lower.

Texas Instruments Inc. (TXN $24) updated its 3Q outlook, announcing that EPS is expected to be in a range of $0.66-0.72, compared to a prior view of between $0.64-0.74, with revenues forecasted to come in a range of $3.62-3.78 billion, versus its previous outlook of between $3.55-3.85 billion. Analysts were forecasting the company to post 3Q EPS of $0.69, and revenues of $3.69 billion. Shares traded lower.

Shares of PG&E Corp. (PCG $44) fell over 8% after a natural gas pipeline owned by the company ruptured and exploded in the San Francisco suburb of San Bruno on Thursday night. According to the most recent reports, the blast killed six people and destroyed 38 homes. Federal investigators and the National Transportation Safety Board have launched a probe into the explosion, and PG&E issued a statement saying "if it is ultimately determined that we were responsible for the cause of the incident, we will take accountability."

Lululemon Athletica Inc. (LULU $41) announced 2Q EPS of $0.30 and revenue of $152.2 million, which beat analysts' expectations of $0.24 and $146 million, respectively. The Vancouver-based maker of high-end athletic wear boasted same-store sales - sales at stores open at least a year - increased 31% y/y, above the company's own forecast of an increase in the "mid-20’s." LULU raised its full-year profit forecast and said it's planning on opening 20-25 new stores in 2011, which will be added to the 130 stores already open in North America and Australia. Shares of LULU were solidly higher.

Wholesale inventories increase to highlight light economic docket

Wholesale inventories for July increased 1.3% month-over-month (m/m), well above the 0.4% advance that economists surveyed by Bloomberg had forecasted, and June's 0.1% rise was revised higher to a 0.3% increase. Inventories of durable goods rose 1.0% m/m, metals and minerals-excluding petroleum-increased 2.7%, and stockpiles of electrical and electronic goods gained 2.1%. Meanwhile, inventories of nondurable goods rose 1.7%, farm product raw materials jumped 11.6%, and levels of apparel, piece goods, and notions were up 4.1%. Sales increased 0.6% in July, led by a 0.6% in nondurable goods and an increase of 3.3% in sales of machinery, equipment, and supplies. The inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-increased from 1.15 months to 1.16. Treasuries finished mostly lower, as the yield on the two-year note was flat at 0.57%, the yield on the 10-year note rose 3 bps to 2.79%, and the 30-year bond yield advanced 3 bps to 3.87%.

In other economic news in North America, Canada reported that its net change in employment rose by 35,800 in August, after falling 9,300 in July, and compared to the 30,000 increase that economists forecasted. The nation’s unemployment rate unexpectedly increased from 8.0% to 8.1%, as more people entered the labor force.

European economic data mixed, Japan GDP revised upward

The European economic front yielded a plethora of data, with some focus on industrial production, as output in France and Sweden both growing more than expected, while Italy's production came up short of forecasts. Also, inflation data was prevalent across the pond, with UK producer prices increasing at the slowest annual pace in August in six months, while consumer prices in Spain rose at a modest pace to match expectations. Finally, Italy's 2Q GDP was revised to a larger than previously forecasted pace of expansion.

In Asia/Pacific, the final revision to Japan's 2Q GDP was changed to show a 0.4% quarter-over-quarter (q/q) rate of expansion, compared to the previous 0.1% growth that was reported, and inline with economists' expectations. On an annualized basis Japan's GDP was revised to a 1.5% expansion, from the 0.4% that was previously projected, and also matching the forecast of economists. Also, the Japanese government unveiled a 920 billion yen ($11 billion) stimulus package today, which also helped ease the advance in the yen and add to the upbeat economic backdrop. Meanwhile, China’s trade surplus narrowed more than expected as imports grew much more than anticipated, while exports rose at a slightly smaller pace than forecasted.

In other economic news in the region, India's industrial production surged 13.8% y/y for July, above the 7.8% increase that was expected, but India’s markets were closed today.

Stocks finish at arm's length of flatline as data evokes mixed emotions

The US equity markets finished not too far from the flatline but stocks posted solid divergent moves above and below the unchanged mark in separate sessions this week as the bulls and bears both had data to help their respective economic cases. European debt and banking sector concerns resurfaced to stymie sentiment, while the US economic data painted a mixed picture. Optimism that came from a steeper-than-forecasted drop in weekly initial jobless claims and larger-than-anticipated narrowing of the trade deficit was kept in check by the Federal Reserve’s Beige Book, a read on current economic conditions across the US, noting "widespread signs of a deceleration compared with the preceding periods."

Although the economic calendar contributed to the bulk of the markets direction even though being relatively light, there was some news worth noting this week, mainly in the tech sector. Oracle Corp. (ORCL $25) announced that Mark Hurd has joined that company as its President and has been named to its Board of Directors. Hurd resigned last month from Dow member Hewlett-Packard Co. (HPQ $38) amid a sexual harassment investigation, which HPQ determined there was no violation of its sexual harassment policy, but did find violations of its Standards of Business Conduct. HPQ filed a lawsuit against ORCL following the announcement and ORCL's CEO Larry Ellison said HPQ is making it "virtually impossible" for the two companies to continue to cooperate and work together in the IT marketplace. Meanwhile, Apple Inc. (AAPL $263) announced that it has relaxed all restrictions on the development tools used to create iOS applications for its iPhone and iPad devices. Shares of Adobe Systems Inc. (ADBE $32) traded sharply higher after the announcement as AAPL’s program-developer license dropped restrictions on development tools offered by ADBE, which it previously excluded products offered by the company..

Economic data heats up next week

The economic calendar starts with Tuesday's release of advance retail sales, forecasted to rise 0.3% month-over-month (m/m) in August, after increasing 0.4% in July, while sales ex-autos are also estimated to grow 0.3% in August, after advancing by 0.2% in July. Same-store sales results -sales at stores open at least a year-reported by retailers were generally better-than-expected. The retail sales report includes spending at supermarkets and gas stations.

Wednesday brings the August reading on industrial production, expected to rise 0.2% in August after advancing by 0.1% in July, and capacity utilization, forecasted to rise to 75.0% from 74.8% in July. Industrial production has been a source of strength thus far this year.

Thursday brings the Producer Price Index (PPI), expected to show prices at the wholesale level advanced by 0.3% m/m in August, on the heels of a 0.2% increase in July, while the core rate, which excludes food and energy, is expected to rise a mere 0.1% after increasing 0.3% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a continued deceleration, to 3.0% in August versus 4.2% the prior month on a headline basis, and a 1.3% increase at the core level, down from a 1.5% increase in May. The release precedes Friday's report on the Consumer Price Index (CPI), forecasted to show a 0.3% m/m increase, after increasing by the same rate in July, while ex-food and energy, it is expected to post another rise of 0.1% m/m. On a y/y basis, the CPI is expected to increase 1.2% at the headline level and 1.0% y/y at the core level.

Other releases on the US economic calendar include the NFIB Small Business Optimism survey, business inventories, the import price index, the Empire Manufacturing Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed's Business Activity Index, and the University of Michigan Consumer Sentiment Index.

The international economic calendar will be dominated by China, which is set to release the majority of their monthly economic statistics. Scheduled Chinese data includes money supply, new loans, PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending. Additionally, the Conference Board releases its July leading economic indicator index for China.

Elsewhere in Asia/Pacific, Japan is slated to announce industrial production, and Australia will report business and consumer confidence and dwelling starts, while the central bank of New Zealand is set to discuss monetary policy.

Economic releases in Europe will include the German PPI, wholesale prices, and the Zew survey of economic conditions, euro-zone industrial production, CPI, and employment, UK house prices, consumer confidence, CPI, retail price index, employment and retail sales.

Other reports in the Americas include Canadian capacity utilization and manufacturing sales, while Brazil releases retail sales.