Evening Market Update

Traders on the Fence Amid Bernanke Comments

US equities were rangebound on the first day of the trading week, finishing mixed, as traders mulled over comments from Federal Reserve Chairman Bernanke made over the weekend, in which he suggested the possibility of additional stimulus should economic growth remain at a level that doesn’t help tackle the nation’s high unemployment rate. On the equity front, both Kellogg and Dow member Pfizer announced the departure of their respective CEOs, Sprint Nextel unveiled a new plan aimed at cutting costs and improving service, Dollar General reported better-than-forecast 3Q earnings, but lower-than-expected same-store sales results weighed on shares, and Barnes & Noble may have another suitor – its smaller rival, Borders Group. Treasuries were higher on the day amid a US economic calendar that was empty and will be light for the remainder of the week.

The Dow Jones Industrial Average fell 20 points (0.2%) to 11,362, the S&P 500 Index lost 2 points (0.1%) to 1,223, while the Nasdaq Composite advanced 3 points (0.1%) to 2,594. In lighter volume, 805 million shares were traded on the NYSE and 1.6 billion shares were traded on the Nasdaq. Crude oil gained $0.19 to $89.38 per barrel, wholesale gasoline lost $0.01 to $2.34 per gallon, and the Bloomberg gold spot price gained $10.73 to $1,424.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.7% higher at 79.57.

Dow member Pfizer Inc. (PFE $17) announced that its President and Chief Executive Officer Jeffrey Kindler has retired unexpectedly and will be replaced by Ian Read, who is currently the company’s head of global biopharmaceutical operations. Kindler noted that the combination of meeting requirements of the company’s stakeholders and the 24/7 nature of his responsibilities, has made this period “extremely demanding on me personally,” and he is excited to be able to “recharge my batteries.” Also, Kellogg Co. (K $49) reported that its President and CEO David Mackay told its Board of Directors that he plans to retire and John Bryant, the company’s current Chief Operating Officer, will succeed Mackay, effective January 2, 2011. Mackay said he recently became eligible for retirement and made a commitment to spend more time with his family. PFE was slightly higher, while K was modestly lower.

Dollar General Corp.  (DG $31) reported 3Q EPS ex-items of $0.39, four cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 10.1% year-over-year (y/y) to $3.2 billion, roughly inline with the Street’s forecasts. The discount retailer raised its full-year guidance. However, shares came under solid pressure as the company’s 4.2% y/y increase in same-store sales—sales at store open at least a year—came in below analysts’ expectations.

Sprint Nextel Corp. (S $4) was nicely higher after the wireless phone carrier unveiled a new network plan aimed at implementing multimode technology to enhance service, create network flexibility, reduce operating costs and improve environmental sustainability. The company said it estimates the total cost could be up to $5 billion, but the total net financial benefit for a seven-year period could reach $11 billion.

In a filing with the Securities and Exchange Commission (SEC) disclosing an increased stake of Borders Group (BGP $1) to 37.3% from 31%, activist hedge-fund manager William Ackman said he was set to provide financing for a $900 billion, of $16 per share, all-cash buyout of larger rival Barnes & Noble (BKS $15). BKS had announced in August that it was exploring strategic alternatives, including the possibility of the sale of the company. Both Mr. Ackman and BKS declined comment, while a BGP spokesperson said it welcomed Mr. Ackman’s participation in any proposed merger, as it has previously approached BKS of its interest in a combination and was “looking forward to continuing those discussions.” Both BKS and BGP were higher on the day.

With US economic calendar light, Europe, China, and Washington to receive the spotlight

Treasuries finished higher with no economic reports scheduled for release in the US and as traders digested comments over the weekend from Federal Reserve Chairman Ben Bernanke. The yield on the two-year note shed 4 bps to 0.43%, the yield on the 10-year note lost 7 bps to 2.94%, and the 30-year bond yield was 7 bps to 4.24%.

In speaking on CBS’ “60 Minutes”, Bernanke said that the US economy is growing at a rate barely enough to keep the unemployment rate stable and that the central bank could extend its asset purchase program, known as quantitative easing, if more stimulus is needed.

Also, with no major reports scheduled for this week’s US economic calendar, the market’s focus will likely surround news out of Europe and China. Ireland’s legislature will vote on the 2011 budget tomorrow and the Bank of England meets on Wednesday and Thursday, while China’s top leaders meet to discuss economic policies for 2011. However, the political front in the US has the potential to garner some attention as 2010 lives out its last days, with traders searching for some US tax-policy clarity, which could come before the New Year. The Wall Street Journal reported that White House officials and congressional Republicans are closing in on a deal that would extend current income-tax rates for all Americans as well as a benefits program for the long-term unemployed.

Our Schwab experts point out that Congress and the Obama administration must come to an agreement on tax policy going forward, so consumers and businesses can plan for the future. We believe that most (if not all) of the Bush tax cuts will be extended, but it needs to happen by year-end to avoid a massive hit to paychecks come 2011. We believe cooler heads will prevail, but risks to that belief are certainly heightened.

European officials meet to discuss euro-area crisis

European policy makers met in Brussels today, with a main topic of discussion being the size of the euro-area’s near $1 trillion bailout program. Some members of the euro-zone have pushed for increases in the size of the region’s rescue plan, while Germany dismissed such action, with Chancellor Angela Merkel saying, “Right now, I see no need to expand the fund,” adding that the notion of participating in joint bond sales was prohibitive under European Union treaties. In the meantime, Moody’s Investors Service downgraded Hungary’s credit rating to just above junk status. On the European economic front, the calendar offered little data for traders to digest, with the lone release worth mentioning being a gauge of euro-zone investor confidence, which deteriorated more than economists had expected for December.

Further east, the economic docket didn’t offer any reports of note and markets were mixed.

Tomorrow, the release of pertinent economic news in the US will remain sparse with only consumer credit being the solitary item on the schedule, forecast to fall by $1.0 billion in October following a $2.1 billion decline in September, while reports internationally will include industrial production from France and the UK, factory orders from Germany, and Japan’s Leading Index. As well, the Bank of Canada will meet to discuss monetary policy where no change to its main overnight rate is expected.