Evening Market Update

No QE3 But the Bulls Run Free

Equity markets were able finish higher on Friday, as markets showed a good deal of resiliency in the absence of plans for additional stimulus being revealed during Fed Chairman Ben Bernanke's speech today. Treasuries were higher on the day due in part to a downward revision in 2Q GDP agitating recession fears, while an upward revision in the University of Michigan's Consumer Sentiment Index worked to partially soothe those fears. News from the equity front was highlighted by very strong earnings from Tiffany and Co. and reports that Dow member Bank of America is closing in on a deal to sell its stake in China Construction Bank Corp. However, not all equity news was positive as OmniVision offered weaker-than-expected revenue guidance and shares of Sino-Forest Corp. were hammered by alleged misrepresentation in the company’s financials.

The Dow Jones Industrial Average picked up 134 points (1.2%) to 11,284, the S&P 500 Index gained 18 points (1.5%) to 1,177, and the Nasdaq Composite rose 60 points (2.5%) to 2,480. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.12 to $85.42 per barrel, wholesale gasoline lost $0.03 to $2.93 per gallon, and the Bloomberg gold spot price added $45.75 to $1,820.20 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was down 0.6% falling to 73.78. For the week, including dividends, the DJIA was up 4.3%, the S&P 500 Index gained 4.7%, and the Nasdaq Composite rose 5.9%.

Dow member Bank of America Corp. (BAC $8) continued its post-Buffet rebound as CNBC reported today that Bank of America is in the final stages of negotiating a sale of the majority of its 10% stake in China Construction Bank Corp. (CICHY $14) to various purchasers from the US, China, Malaysia and the Middle East. The sale is expected to generate between $8.5 and $9 billion and could be agreed upon by the start of next week. BAC declined to comment on the matter and shares of BAC finished modestly higher.

Tiffany and Co. (TIF $69) reported 2Q earnings ex-items of $0.86 per share, above the $0.70 consensus estimate of analysts surveyed by Reuters, with revenues rising 30% year-over-year (y/y) to $873 million, exceeding the $786 million that the Street was looking for. 2Q same-store sales-sales at stores open at least a year-gained 22% y/y, due to "strong growth in all geographic regions." Also, the upscale jewelry and department store retailer said it has been able to absorb precious metal and gemstone cost increases while improving its gross and operating margins. TIF raised its full-year profit guidance to reflect its 2Q results. Shares finished nicely higher.

OmniVision Technologies Inc. (OVTI $17) ended the day sharply lower after the digital-imaging technology company issued 2Q EPS and revenue guidance that fell well short of expectations. OVTI said it expects 2Q earnings between $0.52-0.64, compared to $0.73 that analysts had expected, and revenues in a range of $255-275 million, versus the $292 million Street forecast. The disappointing outlook accompanied OVTI’s fiscal 1Q earnings report, in which it posted profits of $0.76 per share, five cents north of estimates, and revenues of $276 million, roughly inline with expectations.

In other North American equity news, the Ontario Securities Commission (OSC) ordered five executives, including the CEO of Sino-Forest Corp. (SNOFF $1), a forestry operator in the People’s Republic of China, to resign, due to the appearance that they "misrepresented revenue and/or exaggerated some its timber holdings." However, the order to resign was rescinded later in the day, pending a hearing, but the OSC suspension of all trading in the securities of Sino-Forest Corp. in Toronto will remain in effect for at least 15 days. The shares of SNOFF in the US closed down over 70%.

2Q GDP revised lower, Fed Chief stands his ground and consumer sentiment improves

The second look at 2Q Gross Domestic Product, the broadest measure of economic output, showed a smaller rate of expansion than initially reported as quarter-over-quarter (q/q) annualized growth was adjusted from a rise of 1.3%, to a pace of 1.0%. This compared to the modest 0.4% increase in 1Q, and the 1.1% growth that was forecasted by a Bloomberg survey of economists. However, personal consumption was revised higher than expected, gaining 0.4%, from the initial 0.1% increase, down from the 2.1% that was posted in 1Q, and compared to the 0.2% growth that was forecasted.

The adjustment lower reflected downward revisions to private inventory investment and to exports that were partially offset by upward revisions to nonresidential fixed investment and to personal consumption.

In the inflation components of the report, the GDP Price Index was unexpectedly adjusted upward to a rise of 2.4%, compared to the unrevised 2.3% increase that economists anticipated, and the core PCE Index, which excludes food and energy, was surprisingly revised higher to a gain of 2.2%, compared to the unchanged gain of 2.1% that was expected.

Elsewhere, the final University of Michigan Consumer Sentiment Index was revised roughly inline with forecasts to 55.7 from the preliminary reading of 54.9 for the month of August, but down from the 63.7 level posted in July. Economists expected an increase to 55.8. The upward revision reflected a better-than-initially reported economic outlook, which offset a deterioration in the current economic conditions component. Additionally, consumers’ outlook on short-term inflation was revised modestly higher to 3.5% from 3.4%, while long-term inflation expectations remained unadjusted at 2.9%.

However, the expected highlight of the economic day, in the form of the speech by Federal Reserve Chairman Ben Bernanke at the Fed’s annual gathering in Jackson Hole, Wyoming, failed to offer any new policy signals as some had expected. Bernanke did not indicate that further additional stimulus, or QE3, was on the way, reiterating that the Fed has a range of tools that could be used, which were discussed in its early August meeting. On inflation, the Fed Chief said, "we expect inflation to settle, over coming quarters, at levels at or below the rate of 2%, or a bit less," that most Fed participants view as being consistent with its dual mandate. While holding off on further economic stimulus measures from the Fed, Bernanke noted that "the country would be well served by a better process for making fiscal decisions." He pointed out that, "the negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses." Finally, Bernanke noted that the Fed's originally scheduled one-day policy meeting scheduled for September 20 has been extended to a two-day event, "to allow a fuller discussion."

Treasuries finished higher following the economic data and Bernanke's speech, the yield on the 2-year note finished down 2 bps to 0.19%, the yield on the 10-year note fell 4 bps lower to 2.19%, and the 30-year bond rate declined 7 bps to 3.53%.

Major changes in Japanese government and more weakness from U.K. economic data

The UK 2Q GDP was left unrevised from its initial report, showing a 0.2% q/q rate of growth after expanding by 0.5% in 1Q, inline with expectations. On a year-over-year basis, UK GDP grew at a 0.7% pace, also unrevised, after rising 1.6% in 1Q. Moreover, a gauge of UK services activity declined 0.1% month-over-month (m/m) in June, after increasing 1.6% in May. In other European economic news, German import prices rose 0.8% m/m in July, compared to the 0.3% gain that economists expected, after falling 0.6% in June. On a year-over-year basis, Germany's import prices were 7.5% higher, versus the 7.0% rise that was expected and the 6.5% gain that was seen in June.

Headlines from Japan dominated the Asian news front, as the nation's Prime Minister offered his resignation. Prime Minister Naoto Kan resigned amid criticism regarding how he led the country in the wake of the March earthquake and tsunami. According to Bloomberg, Japan’s ruling party will select his replacement on August 29. Additionally, Japanese consumer prices unexpectedly rose in July.

Despite lingering headwinds, stocks sail higher

Although sentiment continued to be held in check by persistent eurozone debt contagion concerns and worries that the US and European could slip into recessions, US stocks posted a strong advance this week to cut into the double-digit percentage declines that major equity markets had racked up in August. Working in the bulls' favor, we got some better-than-expected readings on manufacturing activity in China and Europe and stronger-than-anticipated US durable goods orders for July, while the concerns about the unrest in Libya eased as rebel forces toppled Qaddafi’s regime.

Elsewhere, the equity front, which had mostly taken a backseat recently to the aforementioned eurozone and recession concerns as 2Q earnings season wound down, garnered some attention. Apple Inc. (AAPL $383) took the resignation of co-founder and CEO Steve Jobs relatively in stride, while Dow member Bank of America Corp. (BAC $8) rebounded from its recent pounding on the announcement that billionaire Warren Buffett's Berkshire Hathaway Inc. (BRK/B $70) invested $5 billion in cash into the financial institution.

Full calendar of economic data in the spotlight next week

A week full of economic data kicks into gear Tuesday beginning with the S&P/CaseShiller Home Price Index, forecasted to show prices flat m/m and declining by 4.6% y/y in June. Pricing data lags sales data by a month. However, the attention of markets are likely to be more attuned to the midday release of the minutes from the August Federal Open Market Committee (FOMC) meeting. The Fed downgraded its assessment of the economy at the last meeting, and surprisingly gave a timeframe for keeping the fed funds rate at an exceptionally low level, saying this condition is anticipated to be the case through at least mid-2013, causing three members to dissent. The discussion around the dissents, as well as the merits and costs of the tools at the Fed’s disposal, are likely to garner close scrutiny.

Elsewhere on the US economic calendar will be readings on the state of the economy in August. Regional readings on manufacturing showed a significant deterioration in August, and the national ISM Manufacturing Index is also expected to decline, with the Bloomberg survey of economists expecting to show a contraction in the manufacturing economy, as the forecast of 48.0, would fall below the 50 level that separates contraction from expansion. The companion ISM Non-Manufacturing Index will be not be reported until the following week.

While surveys have shown deterioration in sentiment and intentions, the state of the job market provides a more tangible read on the economy, particularly the leading indicator of weekly jobless claims, which will be reported on Thursday. Other jobs readings include Wednesday's ADP Employment Change and the employment component of the ISM report. On the last trading day before the extended Labor Day holiday weekend, Friday brings nonfarm payrolls, which are expected to grow by 80,000 jobs in August, after rising by a better-than-expected 117,000 in July, and private-sector payrolls are projected to increase 110,000, after advancing by 154,000 in July. The unemployment rate is forecasted to remain at 9.1% and average hourly earnings are anticipated to rise 0.2% m/m, after gaining 0.4% in July.

Other reports on the US economic calendar for next week include: personal income and spending, the PCE deflator, pending home sales, Consumer Confidence, MBA mortgage applications, factory orders, as well as nonfarm productivity and unit labor costs. Other releases elsewhere in the Americas include Canada's industrial product price and raw materials price indexes, and June GDP, and Brazil's industrial production, manufacturing PMI, August trade balance and 2Q GDP, and meeting of the central bank of Brazil.

Economic releases from Europe will include eurozone consumer confidence, CPI, PPI, and unemployment, eurozone and UK manufacturing PMI Indices, German CPI, retail sales, unemployment, and detailed 2Q GDP, UK home prices and consumer confidence. Reports expected out of the Asia/Pacific region include Japan’s jobless rate, retail trade, industrial and vehicle production, housing starts, and vehicle sales, Australia's building approvals, house prices and retail sales, manufacturing PMIs from China, South Korea and Taiwan, as well as Wednesday's exports from South Korea, the first major country to report exports for August.