Evening Market Update

Tech Stocks Spooked, Jobs Disappear

Stocks were mixed today, highlighted by a sell-off in technology shares after a warning from a company in a sector that was viewed as an area of strength, cloud-computing. Shares tied to cloud-computing received a boost in late August after flexible data storage firm 3PAR was the subject of a bidding war, and the revenue warning from data center services company Equinix Inc provided the kindling for profit-taking in the sector today. Elsewhere, sentiment was hampered by an unexpected decline in private sector payrolls reported by ADP and a dip in mortgage applications, prompting Treasuries to move higher. In earnings news, YUM! Brands Inc and Constellation Brands beat the Street, while Costco Wholesale Corp posted better earnings but revenues below expectations, and Monsanto Co missed estimates. In M&A news, Dow member GE purchased privately-held energy infrastructure firm Dresser Inc for $3 billion and acquired $1.6 billion in credit card assets from Citigroup Inc. In afternoon action, the Wall Street Journal reported that Apple Inc was readying a CDMA version of its iPhone that could be used on the Verizon Wireless network.

The Dow Jones Industrial Average rose 23 points (0.2%) to close at 10,968, the S&P 500 Index lost 1 point (0.1%) to 1,160, and the Nasdaq Composite lost 19 points (0.8%) to 2,380. In moderate volume, 977 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $0.41 to $83.23 per barrel, wholesale gasoline rose $0.03 to $2.16 per gallon, and the Bloomberg gold spot price advanced $8.10 to $1,348.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% lower at 77.39.

Costco Wholesale Corp. (COST $65) announced fiscal 4Q EPS of $0.97, two pennies above the Reuters estimate, as revenues rose 8% year-over-year (y/y) to $23.6 billion, versus the $24.2 billion that the Street had expected. Same-store sales—sales at stores open at least a year—at the wholesale retailer rose 6% including gasoline inflation and foreign exchange, while excluding these variables, sales rose 4%. Meanwhile, COST’s same-store sales for September—which will be reported by most major retailers tomorrow—increased 5% including gas and currency, and rose 4% excluding these impacts. COST erased an early loss and closed higher.

Monsanto Co. (MON $48) reported a fiscal 4Q loss ex-items of $0.09 per share, compared to the shortfall of $0.06 per share that analysts were anticipating, while revenues at the agriculture firm rose 4% y/y to $1.95 billion, above the $1.81 billion that the Street had expected. MON said sales of its seeds and genomics segment were boosted by higher corn and cotton revenues, which helped offset the lower sales for the agriculture productivity segment due to pricing action of Roundup and other glyphosate-based herbicides. MON issued full-year 2011 EPS guidance that was below analysts’ estimates. Shares fluctuated around the unchanged level, closing higher.

Dow member General Electric Co. (GE $17 ¹) announced that it has reached an agreement to acquire privately-held global energy infrastructure company Dresser Inc. for $3 billion. The companies said the deal will enhance Dresser’s capability to provide energy technologies to a much broader segment of the energy sector. Separately, GE announced that it has acquired $1.6 billion in credit card assets from Citigroup Inc. (C $4). Financial terms of the deal were not disclosed. Shares of GE rose, while C was lower.

YUM! Brands Inc. (YUM $47) reported 3Q EPS ex-items of $0.73, one penny above the consensus estimate of analysts, with revenues increasing 3% y/y to $2.9 billion, inline with the Street’s forecast. The parent of Taco Bell, Pizza Hut, and KFC said it saw same-store sales grow 1% y/y in the US as well as in its international markets, with sales in China increasing 6%. YUM raised its full-year EPS forecast as new unit development in China and its international segment is a key driver of its overall growth. YUM was higher.

Constellation Brands Inc.  (STZ $19) announced fiscal 2Q EPS ex-items of $0.52, versus the $0.49 that analysts were anticipating, while revenues declined 2% y/y to $863 million, above the $856 million that was forecasted on the Street. The wine and spirits maker said it experienced improving US wine depletion trends and retail execution despite an uncertain consumer and competitive environment. STZ reaffirmed its full-year EPS guidance. STZ rose nicely.

Shares of Equinix Inc. (EQIX $71) were down over 30% after the global network data center services firm announced that it expects its 3Q and full-year revenues to be below the company’s previous outlook. EQIX expects 3Q revenues to be in the range of $328-330 million, the midpoint of which is 2.2 percent lower than the midpoint of its previous outlook, and full-year revenues to be approximately $1.215 billion, 1.2 percent lower than the midpoint of it previous outlook. EQIX said the updated guidance is due to “underestimated churn assumptions” in its North American forecast models, greater-than-expected discounting to secure longer-term contract renewals and lower-than-expected revenues attributable to the Switch and Data business acquired in April 2010. However, the company did say it expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be above its previous forecast.

In afternoon action, the Wall Street Journal reported that Apple (AAPL $289) would begin mass production of a CDMA iPhone that would enable Verizon Wireless, a joint venture between Verizon Communications Inc (VZ $33) and Vodafone Group PLC (VOD $26), to begin selling the smartphone for use on its network in early 2011, citing people briefed by Apple. A phone using CDMA technology would end the exclusive US arrangement that Apple has had with AT&T (T $29) since the debut of the iPhone in 2007. An iPhone for the Verizon network has been rumored for some time, and there are other networks that use CDMA technology. None of the companies commented on the report, and shares of T were lower, while VZ, VOD and AAPL rose.

Private sector payrolls unexpectedly fall, mortgage applications dip

The ADP Employment Change Report showed private sector payrolls fell by 39,000 jobs in September, compared to the forecast of economists surveyed by Bloomberg, which called for a 20,000 increase, and August’s 10,000 job decrease was favorably revised to a 10,000 gain. ADP noted that there “simply is no momentum in employment,” as jobs were shed from goods-producing, construction, and manufacturing sectors, which more than offset a slight increase in employment in the service-providing sector—the eighth consecutive monthly gain. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect a flat reading in September, after falling 54,000 in August. Excluding government hiring, September private sector payrolls are expected to increase 75,000, after expanding by a better-than-forecasted 67,000 in August.

In other economic news, the MBA Mortgage Application Index inched 0.2% lower last week, after the index that can be quite volatile on a week-to-week basis, dipped 0.8% in the previous week. The slight decline came as the Refinance Index fell 2.5%, offsetting a 9.3% gain in the Purchase Index. The decrease in the overall index came amid a 12 basis-point drop in the average 30-year mortgage rate to 4.25%, the lowest rate since records began.

Treasuries were higher following the employment and housing sector data. The yield on the two-year note lost 2 bps to 0.38%, the yield on the 10-year note declined 8 bps to 2.40%, and the 30-year bond yield fell 8 bps to 3.67%. The yield curve has flattened recently, as short-term rates have remained stable, while the prospects of another round of quantitative easing by the Fed has pushed down longer-term rates.

Strong German factory orders helps overshadow Ireland debt rating downgrade

Stocks in Europe showed little reaction to a credit rating downgrade of Ireland from AA- to A+ by Fitch Ratings, which noted the “exceptional and greater-than-expected cost” of the nation’s banking sector bailout, per Bloomberg. Last week, Ireland said the bailout of the sector could total up to 50 billion euros ($69 billion), resulting in a budget deficit of 32% of its GDP.

The actions of central banks to provide additional stimulus and the impact on currencies is dominating recent market action, led by the Bank of Japan yesterday lowering rates, committing to virtually zero rates until price stability is in sight, and adding an asset purchase program, as well as comments by the Federal Reserve at its Federal Open Market Committee meeting in September, which paved the way for a renewed asset purchase program in the US. As such, traders will be closely monitoring tomorrow’s monetary policy announcements from the Bank of England and the European Central Bank, which are both expected to keep their benchmark interest rates unchanged at 0.5% and 1.0%, respectively.

Highlighting the economic docket across the pond, factory orders in Germany—Europe’s largest economy—surged 20.3% y/y in August, above the 17.2% increase that economists had projected, and month-over-month (m/m), orders were 3.4% higher, well above the gain of 0.9% that was anticipated. German factory orders were buoyed by demand for exports and investment goods, while consumer goods orders fell 3.9%. Elsewhere, Spain’s industrial output increased 1.4% y/y in August, versus the 0.2% growth that was forecasted. Lastly, the final reading of euro-zone 2Q GDP was left unrevised at a 1.0% quarter-over-quarter (q/q) expansion, and a 1.9% rate of growth y/y, but household consumption within the GDP report was revised lower from a 0.5% increase to a 0.2% gain.

In the Americas, a measure of Canada’s business and government spending unexpectedly accelerated to 70.3 in September from 65.9 the month before. The reading marked a four-year high and was above the decline to 62.0 that was expected.

There were no major economic data released in Asia and action may have been lighter than usual with markets in mainland China remaining closed for a holiday.

On tap: another US jobs measure, central banks in Europe meet

Releases on tomorrow’s US economic calendar include weekly initial jobless claims, expected to increase to 455,000 from 453,000 the week prior, and consumer credit, forecasted to fall $3.5 billion in August.

As previously discussed, investors will also be heeding the actions and statements released from the Bank of England and European Central Bank as they meet to discuss monetary policy tomorrow.

International economic releases will include Japan’s leading index and machine tool orders, Australian employment, UK industrial and manufacturing production, German industrial production, and Canadian building permits.