Evening Market Update

Stocks End Off Session Trough, But Conviction Low

Equity markets rose off the lows of the session, but remained generally down for the day, as conviction regarding the amount of stimulus from the Fed waned. The market has posted strong returns over the past two months after investors believed a large Fed stimulus was nearing. However, sentiment is declining as more Fed speakers talk down the size and questions remain regarding the effectiveness of more stimulus. Meanwhile, economic news remains varied, with today’s data showing unexpected weakness in business spending in the durable goods report, while new home sales and mortgage applications were strong, and Treasuries were lower. In equity news, Dow member Proctor & Gamble Co, Comcast Corp and ConocoPhilips beat the Street, while Whirlpool Corp guided lower and Sprint Nextel Corp posted a larger loss, and Jones Group Inc missed estimates. However, the technology sector was a source of strength, after Broadcom Corp and F5 Networks Inc reported strong results.

The Dow Jones Industrial Average fell 43 points (0.4%) to 11,126, and the S&P 500 Index lost 3 points (0.3%) to 1,182, while the Nasdaq Composite advanced 6 points (0.2%) to 2,503. In modest volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $0.61 to $81.94 per barrel, while wholesale gasoline rose $0.02 to $2.10 per gallon, and the Bloomberg gold spot price lost $14.90 to $1,325.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.6% to 78.09.

Dow member Procter & Gamble Co. (PG $63) reported fiscal 1Q EPS of $1.02, compared to the $1.00 consensus estimate of analysts surveyed by Bloomberg, with revenues increasing 2.0% year-over-year (y/y) to $20.1 billion, versus the $20.2 billion that had been expected. The consumer products conglomerate said it saw broad-based volume growth, and organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, rose by 4% y/y. The company said that the gross margin contracted 70 basis points due mainly to higher commodity costs. PG offered full-year and 2Q EPS guidance that was roughly inline with the Street’s forecast. Shares were modestly higher.

Comcast Corp. (CMCSA $20) announced 3Q EPS ex-items of $0.32, two cents above the Street’s expectation, and revenues rose 7% y/y to $9.5 billion, slightly above the $9.4 billion that analysts were anticipating. The cable television firm said its results were driven by overall customer growth, a robust advertising market and continued strength in business services. However, the company lost 275,000 customers in its video unit but customers in its high-speed internet segment gained by 6.5% and it had 13.2% growth in voice customers. Total revenue generating units—a total of all subscribers—rose 4.0%. Shares rose.

Whirlpool Corp. (WHR $80) reported 3Q EPS ex-items of $2.22, versus the $1.85 forecasted by analysts, with revenues increasing 0.5% y/y to $4.5 billion, roughly inline with the Street’s expectation. The appliance company said it faced a challenging environment during 3Q, which resulted in a “significant slowing” in sales growth compared to the first half of the year, as well as a lower product price/mix and higher material costs. WHR added that based on its current economic outlook, it now expects full-year 2010 US industry shipments to increase approximately 3% compared to the previous expectation of a 5% increase. Shares were solidly lower.

ConocoPhillips (COP $60) achieved 3Q EPS ex-items of $1.50, compared to the $1.45 that analysts were anticipating. The company said production from its exploration and production segment declined from 1.79 million barrels of oil equivalent per day to 1.72 million barrels, due to “normal field declines,” primarily in North America and Europe, as well as asset dispositions. Shares fell.

Sprint Nextel Corp. (S $4) reported a 3Q net loss of $0.30 per share, a larger shortfall than the loss of $0.28 per share that analysts had expected, with revenues increasing 1% y/y to $8.2 billion, topping the $8.0 billion that the Street was looking for. The phone service provider said it achieved its best total company wireless subscriber net additions since 2006, adding 644,000 subscribers driven by positive net postpaid—customers under contract, which are highly coveted in the industry—subscriber growth. S also said it had the best y/y improvement in postpaid customer churn in five years and demand for smartphones “remained strong.” Shares fell nearly 10%.

Jones Group Inc. (JNY $15) shares were down over 20% after the apparel company reported 3Q earnings of $0.54 per share, short of the $0.62 that analysts forecasted, but revenues rose 19% y/y to $1.0 billion, roughly inline with analysts forecasts. The company said raw material costs, freight costs and tight factory capacity were evident in 3Q and challenged gross margins.

Broadcom Corp (BRCM $42) shares were over 10% higher after the company reported adjusted 3Q EPS of $0.74, three cents above the consensus estimate, on revenues of $1.8 billion, also above the Street’s $1.75 billion forecast. The results from the maker of chips for cell phones and communication equipment were better than many other semiconductor reports this earnings season, accounting for the rise in the stock. BRCM said that the cellular business is expected to be a “dramatic growth driver” over the next several quarters for the company, and said that the tablet PC was a “better form factor” than netbooks, and that the tablet market is likely to have hundreds of solutions introduced over the next year or two.

F5 Networks Inc (FFIV $118) reported non-GAAP 4Q EPS ex-items of $0.79, beating the consensus estimate of $0.71 on better-than-expected revenues and margins. The application delivery equipment maker also forecasted higher growth than the Street for next quarter, and said that positive trends that drove business in its 2010 fiscal year look to continue in 2011. These trends include businesses increasingly turning to technologies that enable flexible, on-demand access to resources while reducing overall costs. Shares were nearly 15% higher.

Durable goods orders mixed, mortgage applications rise, new home sales on deck

New home sales rose 6.6% month-over-month (m/m) in September at an annual rate of 307,000 units. New home sales have been hitting all-time lows since data began in 1963, so while the upside surprise is positive, sales remain very depressed. The median home price rose 9.3% m/m to $223,800, coming off the lowest level in since December 2003 that was reached in August. Inventory of new homes for sale fell 1.0% to 204,000 units, the lowest since July 1968 according to Bloomberg, and represents 8.0 months of supply at the current sales rate. New home sales are considered a more timely indicator of conditions in the housing market than existing home sales, as they are based on signings instead of closings. Sales of new homes could benefit in future months from the documentation issues in the foreclosure market.

Durable goods orders rose 3.3% m/m in September, better than the 2.0% increase that was expected by economists surveyed by Bloomberg, while August’s figure was favorably revised from a 1.3% drop to a decline of 1.0%. Ex-transportation, orders unexpectedly fell, dropping by 0.8%, compared to the expectation of a 0.5% increase, and August was adjusted from a 2.0% increase to an advance of 1.9%. Non-defense capital goods excluding aircraft, considered a proxy for business spending, also surprisingly slipped by 0.6% in September, compared to the 0.8% increase that was anticipated, and after jumping by an upwardly revised 4.8% in August. The decline in the ex-transportation figure was paced by a 4.0% drop in orders for computers and electronic products, specifically an 18.6% plunge in orders for communication equipment.

The decline in the business spending component of the durable goods report was particularly disappointing, as this has been an area of strength within the gross domestic product (GDP) data, growing at a double-digit quarter-over-quarter rate for the past three quarters, and businesses have dramatically underinvested over recent years, resulting in a decline in the value of plant and equipment in the US, as the rate of depreciation has outpaced new investment. However, monthly data can be volatile and do not necessarily always turn into a new trend.

In other economic news, the  MBA Mortgage Application Index rose 3.2% last week, after the index that can be quite volatile on a week-to-week basis, fell 10.5% in the previous week. The increase came as the Refinance Index gained 3.0%, joining a 3.9% advance in the Purchase Index. The upward move in the overall index came amid a 9 basis point drop in the average 30-year mortgage rate to 4.25%, just above the record low of 4.21% on October 8.

Treasuries were lower, with the yield on the two-year rising 1 bp to 0.40%, the yield on the 10-year note was 8 bps higher at 2.72%, and the 30-year bond yield gained 6 bps to 4.05%.

However, the US dollar was broadly higher for a second-straight session coming as concerns that the Fed’s stimulus efforts expected to be announced at next week’s Federal Open Market Committee’s (FOMC) monetary policy meeting could come up short of what has already been priced into the markets.

International economic data light

In European economic news, France’s consumer spending jumped much more than economists had forecasted m/m in September, and Germany’s consumer prices rose 0.1% m/m in October, which was inline with expectations. On a y/y basis, German consumer prices are up 1.3% as anticipated. Lastly, German unemployment fell below the three-million mark in October, hitting the lowest level in 18 years.

In Asia/Pacific releases, South Korea’s 3Q GDP decelerated to half of 2Q’s rate, expanding 0.7% quarter-over-quarter (q/q), and compared to the 0.8% growth that economists had expected, Australia’s consumer prices rose by a smaller amount than anticipated in 3Q, and a gauge of Japanese small business confidence deteriorated in October.

Tomorrow brings jobless claims in the US

The US economic calendar will be light tomorrow, with the sole major release being weekly initial jobless claims, expected to increase to 455,000 from 452,000 the week prior.

International economic releases scheduled include Japanese retail trade, Australia’s leading index, French producer prices, and Italian wages. Additionally, the Bank of Japan meets and the Bank of Brazil will release the minutes from its last monetary policy meeting.