Evening Market Update

Equity Markets Hold On To Modest Gains In Volatile Session

Stocks gave up early gains but still managed to finish in the green, as investors digested numerous earnings reports and economic news on the domestic and international fronts. Traders may have booked some profits from the recent advance in stocks heading into earnings season, while grappling with the potential for further global central bank actions, possibly prompted by a deceleration in the Chinese economy. Treasuries moved lower, as the Index of Leading Economic Indicators came in better than expected and fewer US weekly initial jobless claims were filed, but the Philly Fed Manufacturing Index came in below economists’ expectations. The equity markets received an early boost in the form of promising profit results from Dow members Caterpillar Inc, McDonald’s Corp and Traveler’s Companies Inc, while fellow Dow component AT&T posted stronger-than-forecasted revenues. Elsewhere on the equity front, eBay, UPS, Netflix and Xerox all posted profits that topped forecasts, Kellogg Co lowered its full-year EPS outlook and Visa Inc. boosted its dividend by 20%.

The Dow Jones Industrial Average rose 39 points (0.3%) to 11,147, the S&P 500 Index gained 2 points (0.2%) to 1,180, and the Nasdaq Composite advanced 2 points (0.1%) to 2,460. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil lost $1.86 to $80.68 per barrel, wholesale gasoline fell $0.03 to $2.05 per gallon, and the Bloomberg gold spot price plunged $20.70 to $1,325.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.4% to 77.45.

Dow component Caterpillar Inc. (CAT 79 ¹) reported 3Q earnings of $1.22 per share, easily exceeding the $1.09 estimate of analysts surveyed by Reuters, with revenues jumping 53% year-over-year (y/y) to $11.1 billion, also topping the forecasts of the Street, which expected revenues of $10.7 billion. The construction equipment maker said it aggressively managed costs, while continuing to ramp up production to meet customer demand. CAT added that continuing economic growth in the developing world has been “key” to improving sales. The company boosted its full-year outlook, while offering better-than-expected revenue guidance for 2011 as it expects developing economies to continue to grow. CAT also said it expects developed economies to grow as well in 2011, but at a slower pace than the developing world. CAT traded lower.

Dow member AT&T Inc. (T $28) posted 3Q EPS ex-items of $0.55, inline with the Street’s expectations, while revenues which increased 2.8% y/y to $31.6 billion, topped the $31.2 billion that was expected by analysts. The company said it had record wireless sales and its 2.6 million increase in total wireless subscribers was the highest 3Q net gain in the company’s history. AT&T finished modestly lower.

Dow component McDonald’s Corp. (MCD $78) achieved 3Q EPS of $1.29, four pennies above the consensus estimate of analysts, with revenues increasing 4% y/y to $6.3 billion, which exceeded the $6.2 billon that was forecasted. Global same-store sales—sales at store open at least thirteen months—rose 6.0%. MCD was solidly higher.

Dow member Travelers Companies Inc. (TRV $55) reported 3Q EPS ex-items of $1.81, well above the consensus estimate of $1.51, with revenues increasing 2% y/y to $5.5 billion, slightly above the $5.4 billion that the Street had forecasted. The insurance firm said its underwriting results “remained strong” across each of its business segments. TRV raised its full-year EPS guidance. TRV moved higher.

eBay Inc. (EBAY $27) announced 3Q EPS ex-items of $0.40, three cents above the Street’s estimate, as revenues grew 1% y/y to $2.2 billion, roughly inline with expectations. The global ecommerce and online payment firm said its PayPal business delivered “strong” 3Q performance and gained market share globally, while its results at eBay were “stable.” The company issued better-than-expected 4Q EPS and full-year guidance. Shares were up steeply.

United Parcel Service Inc. (UPS $70 ¹) reported 3Q EPS ex-items of $0.93, five pennies above the expectation of analysts, with revenues increasing 9% y/y to $12.2 billion, compared to the $12.4 billion that the Street was expecting. The package delivery firm said it saw “superior execution” across all business units and its average volume per day rose 5% y/y. The company raised its full-year EPS guidance and said based on the projections of retailers and economists, it expects modest growth during the holiday peak season. Shares were lower after giving up an early advance.

Netflix Inc. (NFLX $173) reported 3Q EPS ex-items of $0.78, compared to the $0.71 that analysts were expecting, with revenues jumping 31% y/y to $553.2 million, slightly above the $550.9 million that was expected. The internet movie subscription service firm said it added 1.9 million net subscribers during the quarter and total subscribers of 16.9 million was 52% higher y/y. NFLX raised its 4Q revenue and subscriber guidance as well as its full-year subscriber outlook. Shares traded sharply higher.

Kellogg Co. (K $50) lowered its full-year 2010 guidance based on softer-than-expected performance, driven by weaker performance in some of the company’s core cereal markets, continued competitive intensity, and lingering impact of the cereal recall. The company now expects EPS growth between 4-5%, from EPS of $3.16 in 2009, and analysts expected the company to post EPS of $3.41. Shares finished higher after overcoming early pressure.

Shares of Xerox Corp. (XRX $11) moved higher after the company reported 3Q EPS ex-items of $0.22, one penny higher than the Street’s expectations, with revenue of $5.43 billion coming in slightly below the $5.45 billion expectation of analysts. XRX also announced that it plans to cut 2,500 jobs over the next year, in addition to the 2,500 cuts announced in January, as it expands its restructuring effort following the acquisition of Affiliated Computer Services earlier this year. CEO Ursula Burns added “I am not confident enough yet to say this ‘better’ will stay forever,” but the company did up its 4Q and full-year guidance.

Outside of earnings, credit card transaction processor Visa Inc. (VV $79) announced that its Board of Directors had declared a 20% increase in its quarterly dividend to $0.15 per share. Shares gave up an early advance to finish lower.

Weekly initial jobless claims decline, Philly Fed and leading indicators set to follow

Weekly initial jobless claims fell by 23,000 to 452,000, but last week's figure was upwardly revised by 13,000 to 475,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 455,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 4,250 to 458,000, and continuing claims dropped by 9,000 to 4,441,000, compared to the 4,420,000 that was anticipated by economists.

Additionally, the Philly Fed Manufacturing Index improved by a smaller amount than expected, rising from -0.7 in September to 1.0 in October, compared to the forecast for an increase to 2.0. The report depicts business activity in the mid-Atlantic region expanded for the first month since July—as a reading of zero is the demarcation point between expansion and contraction. Shipments moved back into expansion territory and employment increased but new orders, although improving, contracted further. Also, prices paid surged, while prices received contracted for the fifth-straight month. Today’s report follows last week’s release of the Empire Manufacturing Index, a measure of manufacturing in the New York region, which unexpectedly jumped in October to a level of 15.73, compared to the estimated increase to 6.00, from September’s level of 4.14.

Meanwhile, the Conference Board released the Index of Leading Indicators for September, which increased by 0.3%, matching expectations, but August’s 0.3% rise was downwardly revised to a 0.1% increase. The gain was paced by positive contributions from the money supply, a favorable yield curve, jobless claims, and stock prices, while negative contributors were the pace of deliveries and building permits.

Treasuries finished lower, after showing little reaction to the employment data, but managed to pare some losses following the manufacturing and LEI reports. The yield on the two-year note rose 1 bp to 0.35%, the yield on the 10-year note increased 7 bps to 2.55%, and the 30-year bond yield gained 7 bps to 3.96%.

Economic data positive out of Europe, Chinese GDP beats expectations

The economic calendar in Europe was highlighted by manufacturing PMI reports depicting stronger-than-forecasted activity in Germany—Europe’s largest economy—and the euro-zone. Additionally, the German government raised its forecast for economic growth for this year and 2011. The favorable data overshadowed disappointing reports on UK retail sales, manufacturing activity in France, and smaller-than-expected expansion in euro-zone services. Moreover, euro-zone consumer confidence came in unchanged for October.

In Asia/Pacific, China reported that its real 3Q GDP expanded at 9.6% y/y, a deceleration from the 10.3% growth in 2Q, but was slightly above the 9.5% increase that economists had expected. Other data out of China included: hotter-than-expected producer prices, inline consumer prices, and slightly stronger-than-forecasted y/y retail sales, while industrial production and fixed asset urban investment were modestly below forecasts on a y/y basis. The data fostered mixed reactions as speculation following China’s central bank’s surprising rate hike on Tuesday ramped up that today’s data would be stronger than what was reported, while the roughly inline data cooled expectations of further near-term tightening efforts in Asia’s largest economy. Other data in the region included a report that showed consumer prices in Hong Kong unexpectedly decelerated in September.

Back in the Americas, Canada’s index of leading economic indicators unexpectedly fell by 0.1% in September, the first decline since April of 2009. Economists were looking for a 0.2% increase in the index, while the August figure was upwardly revised to a gain of 0.6%. The decrease was fueled mainly by a 1.9% drop m/m in new orders for durable-goods manufacturers and a 3.2% decline in a measure of housing starts and existing home sales. Elsewhere, Brazil’s unemployment rate fell to 6.2% in September, down from 6.7% in August and lower than the 6.5% level expected by economists.

There are no major releases scheduled on the US economic calendar tomorrow. The international front will be light as well, with the only reports on the docket being the German IFO business climate survey, Italian retail sales, and Canadian retail sales and CPI.