Evening Market Update

Muted Session Ends Mixed As Earnings Take Full Focus

Stocks closed out the week mixed in a rangebound trading session that was guided by numerous earnings reports, most of which beat the Street’s expectations. The US economic calendar was void of any major releases, as traders look ahead to a plethora of housing data and 3Q GDP due out next week. Focus will also be on this weekend’s G20 meeting of finance ministers in South Korea, where currency action is likely to dominate discussions. The Dow finished slightly below the flatline, even after members American Express and Verizon Communications reported better-than-expected earnings for the third quarter. The equity front also benefited from strong profit reports from Amazon.com, Honeywell International, Compuware, Chipotle Mexican Grill and Schlumberger Ltd, while Bacyrus International missed on the top and bottom lines due to order delays. Treasuries finished the day mixed.

The Dow Jones Industrial Average fell 14 points (0.1%) to 11,133, the S&P 500 Index gained 3 points (0.2%) to 1,183, and the Nasdaq Composite advanced 20 points (0.8%) to 2,479. In light volume, 773 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil gained $1.32 to $82.00 per barrel, wholesale gasoline gained $0.03 to $2.08 per gallon, and the Bloomberg gold spot price rose $2.35 to $1,327.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 77.46. For the week, including dividends, the DJIA increased 0.63%, the S&P 500 Index gained 0.59%, and the Nasdaq Composite advanced 0.43%.

Dow member American Express Co. (AXP $39) reported 3Q EPS of $0.90, three cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 17% year-over-year (y/y) to $7.0 billion, compared to the $6.8 billion that the Street was expecting. The credit card company said revenues reflected higher cardmember spending and higher travel commissions and fees, which were offset by lower interest income due to a smaller loan portfolio and lower yields on both the securitized and non-securitized portions of its portfolio. AXP added that cardmember spending rose 14% y/y with the largest increases coming from businesses, but lending volumes remain below pre-recessionary levels as cardmembers continued to manage their finances carefully and pay down outstanding debt. The company said it remains “cautious” about the economic outlook. Shares were lower.

Fellow Dow component Verizon Communications Inc. (VZ $32) announced 3Q EPS of $0.56, two pennies above the Street’s expectations, but revenues declined 2.9% y/y to $26.5 billion, compared to the $26.3 billion that analysts were forecasting. The company added 997,000 total net customer additions at its wireless unit, while its internet and TV customers grew by 226,000 and 204,000, respectively. VZ said it sees second-half profits at the high end of its previous outlook. VZ traded lower.

Amazon.com Inc. (AMZN $169) posted 3Q earnings of $0.51 per share, three cents above the expectation of analysts, with revenues rising 39% y/y to $7.6 billion, above the $7.4 billion that had been anticipated on the Street. The online retailer said sales at its North American unit jumped 45% y/y, while international segment sales grew 32%, led by steep growth in sales of electronics and other general merchandise. AMZN said its new generation Kindle devices are the fastest selling Kindles of all time and the bestselling products on Amazon.com and its UK website. However, the company issued 4Q operating earnings guidance that came in below analysts’ expectations. AMZN was nicely higher.

Honeywell International Inc.  (HON $47) achieved 3Q EPS of $0.64, two cents above the Street’s forecast, with revenues gaining 9% y/y to $8.4 billion, compared to the $8.2 billion that analysts forecasted. The industrial conglomerate said it saw continued growth across its portfolio with its “short cycle businesses,” such as turbochargers and general industrial products, extending their “strong upward trends.” HON added that its longer cycle solutions businesses demonstrated good growth in the quarter as well, and it is also seeing an uptick in the commercial aerospace aftermarket. The company forecasted full-year EPS and revenues above its previous outlook. HON traded to the upside.

Compuware Corp. (CPWR $10) was sharply higher after it posted fiscal 2Q profits of $0.12 per share, above the $0.09 that analysts were expecting, as revenues rose 3.6% y/y to $225.9 million, above the $221 million that was forecasted on the Street. The software firm said its offerings in the “rapidly growing,” application performance management and secure collaboration markets are increasingly contributing to its overall growth and profitability. Also, the company said its mainframe business continues to sustain its strong renewal rate, and its professional services business in now showing y/y revenue and margin growth.

Chipotle Mexican Grill Inc. (CMG $206) finished up over 10% after the Mexican food restaurant chain reported 3Q EPS of $1.52, versus the $1.31 that analysts had expected, with revenues increasing 23% y/y to $477 million, above the $462 million that was expected. Same-store sales—sales at stores open at least a year—jumped 11.4% y/y, driven by increased traffic in 3Q. The company raised its same-store sales guidance for 2010.

Schlumberger Ltd. (SLB $68) reported 3Q EPS ex-items of $0.70, one penny higher than the Street’s estimate, while revenues increased 26% y/y to $6.85 billion, which was inline with expectations. The world’s largest oilfield services company benefited from increased demand in North America for shale oil and gas, as well as its acquisition of former rival Smith International Inc. The results came despite a steep decline in U.S. offshore activity that resulted from the deepwater drilling ban imposed earlier this year, as well as weak performance internationally. Shares of SLB were up over 5%.

Shares of Bacyrus International Inc. (BUCY $68) fell after the company announced 3Q earnings fell 15.7% y/y, due mainly to order delays as a result of a controversial financing arrangement with a customer in India. The mining equipment maker earned $1.07 per share ex-items on revenue of $937 million, compared to analysts’ estimates of $1.11 and revenue of $1.03 billion. BUCY did affirm its earlier full-year forecast for sales and earnings, as the last hurdles were cleared this week for the delayed orders.

Economic calendar is void of major release to end the week

Treasuries finished mixed as there were no major US reports scheduled for release today. The yield on the two-year note was flat at 0.36%, the yield on the 10-year note was 1 bp higher at 2.56%, and the 30-year bond yield fell 3 bps to 3.93%. The week’s economic front, saw global central bank actions command the lion’s share of attention, highlighted by China’s surprising interest rate hike—the first since 2007. Also, Germany’s Chancellor Angela Merkel suggested that “exit strategies” should be considered as the impact of the global financial crisis wanes, while the minutes from the Bank of England’s most recent monetary policy meeting showed members were split three ways as to the direction its policy should take, with some feeling that the “likelihood that further monetary stimulus would become necessary in order to meet the inflation target in the medium term had increased in recent months.” Moreover, traders continued to expect the Federal Reserve to deploy further stimulus efforts as the release of the Fed’s Beige Book revealed national economic activity continued to rise, but at a “modest pace,” while the report noted strength in consumer spending and manufacturing. The Beige Book is a tool used by the Fed as it summarizes anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for November 2-3.

Amid some caution ahead of this weekend’s G20 meeting of finance ministers, festering concerns about a potential foreclosure crisis unfolding in the US banking sector, and mixed global economic data, the equity markets managed to eke out an advance for the week, aided by the continuation of a better-than-expected earnings season.

International economic news also on the light side

The European economic calendar helped to improve sentiment, as a gauge of business confidence in Germany—Europe’s largest economy—unexpectedly improved. The Ifo Business Climate Index increased to 107.6 in October—the highest since May 2007—from 106.8 in September, and compared to the expectation of economists surveyed by Bloomberg, which called for a decline to 106.5. In other economic news, Italian retail sales were flat for August, inline with expectations.

Back in the Americas, Canadian retail sales unexpectedly increased 0.5% in August, compared to the 0.1% decline expected by economists. The advance was fueled by a 2.1% rise in gasoline sales and a 2.1% gain at furniture stores. In a separate report, the Canadian consumer price index rose 1.9% in September, which was inline with economists’ expectations, while the core rate, which excludes volatile items such as gasoline, increased 1.5%, compared to a 1.6% estimate. The rise in prices is the fastest pace since January, but the Bank of Canada said it remains confident that core inflation will remain below 2% through 4Q 2012 on slower consumer spending and global growth.

There were no major reports out of Asia, but traders will be looking ahead to the weekend’s G20 meeting of finance ministers in South Korea, with the currency markets likely being the main focus, as the Japanese yen continues to trade at the highest level versus the US dollar since 1995 and with rhetoric between China and the US heating up pertaining to the appreciation of the Chinese currency.

Slew of housing data and third quarter GDP due out next week

Friday brings the first reading of 3Q gross domestic product (GDP), expected to grow at a 2.2% quarter-over-quarter (q/q) annualized rate, after expanding by 1.7% in the second quarter. The largest component of GDP, personal consumption, is expected to grow 2.3% in 3Q, after advancing 2.2% in 2Q. With regard to inflation readings, the GDP Price Index is expected to rise 1.9%, and the core PCE Index, which excludes food and energy, is forecasted to increase 1.1%.

Consumer spending has been surprisingly strong and business spending has also been an area of strength, growing at a double-digit rate q/q for the past three quarters. In fact, the largest detractor from GDP during 2Q was the trade balance, as imports (a subtraction from GDP) far outpaced exports. Real gross domestic purchases - purchases by US residents of goods and services wherever produced, a good indicator of underlying demand, increased 5.1% in 2Q, compared with an increase of 3.9% in 1Q.

However, low levels of growth, excess factory capacity, sidelined workers, and oversupply of housing, are combining to cap price increases, and the Fed is concerned about the prospect of deflation and the long time for the economy to return to its potential growth.

Housing market data will be closely watched as well, as homes tend to be the biggest asset for many consumers, and changes in individual’s net worth can have an impact on their attitude toward spending. Data includes Monday’s existing home sales, which reflect closings from contracts entered one to two months earlier, forecasted to increase 4.1% month-over-month (m/m) in September to an annual rate of 4.3 million units, which would be the second consecutive rise post the expiration of the tax incentive. Meanwhile Wednesday’s release of new home sales is expected to show an increase of 4.2% m/m in September to an annual rate of 300,000. Lastly, the S&P/CaseShiller Home Price Index, which lags the sales data by a month, will be released on Tuesday, anticipated to show a 2.2% rise year-over-year (y/y) in August, while falling 0.2% m/m.

Other releases on the US economic calendar include the volatile durable goods orders report, expected to rise 2.3% m/m in September after falling 1.3% in August, while ex-transportation, orders are forecasted to have grown 0.5% m/m, after increasing 2.0% in August. The week also includes the Conference Board’s consumer confidence reading, the MBA Mortgage Applications Index, weekly initial jobless claims, the Chicago Purchasing Manager survey of manufacturing and services sectors, and the final University of Michigan Consumer Sentiment Index for October.

Elsewhere in the Americas, Canada releases August GDP, industrial and raw material prices, while Brazil announces consumer confidence and minutes from the last Bank of Brazil policy meeting.

In Europe, releases include German CPI and employment, French PPI, consumer spending and confidence. Reports out of the UK include 3Q GDP, mortgage approvals, consumer confidence, and housing prices.

In Asia/Pacific, Japan is slated to announce retail trade, industrial and vehicle production, housing starts, construction orders, CPI, employment, and household spending. Australia will report CPI, PPI, business confidence, new home sales and its leading index. Additionally, China and South Korea will release their leading indexes, and South Korea and Singapore announce industrial production.