MarketView for December 15

Summary

Stock prices were, for the most part, lower on Tuesday, with the Dow Jones  industrial average and S&P 500 moving off 14-month highs, as a climb in producer prices raised inflation concerns and economic bellwether General Electric issued a flat outlook for 2010. Tuesday's slide broke a four-day winning streak for both the Dow industrials and the S&P 500. A higher-than-expected increase in the producer price Index for November raised concerns that the Fed may find it difficult to keep benchmark rates at their current level near zero.

General Electric, considered an indicator of the economy's health, pushed stocks lower in the latter part of the session after the company issued a cautious outlook for 2010, stating that its industrial and capital finance profits will likely be flat next year and revenues overall are expected to drop between 5 and 10 percent. GE closed down 1.3 percent at $15.75.

Although there are not expected to be any changes in the Fed's current policy of holding the Fed funds rate near zero, even a slight change in the Fed's tone could make an impact on sentiment because cheap money has been one of the main catalysts of the current market rally. The Fed's two-day policy-setting meeting will conclude with a statement on the economy expected on Wednesday.

Boeing saw its share price close down 0.7 percent at $55.67 after the troubled Dreamliner took off on a runway following two years of delays.

Crude oil settled up 1.7 percent, or $1.18, per barrel at $70.69 sending the share prices of energy and materials companies higher. At the same time, the dollar strengthened against the euro, and the dollar index rose 0.8 percent, hitting its highest level in 2-1/2 months.

Producer Price Index Higher

The producer price index rose 1.8 percent last month and industrial output was up, which sent some inflation jitters through Wall Street. The rise in industrial production, reported by the Fed on Tuesday, was the latest data to suggest the economic recovery is starting to gather some steam. Retail sales also showed strength last month and job losses slowed appreciably.

However, the consensus opinion on the Street appears to be that the increase in the PPI, fueled by a spike in energy costs, did not signal broad inflation pressures given the economy was still hampered by excess capacity. Fed Chairman Ben Bernanke said the economy had a high degree of slack, which should help to keep inflation contained. Bernanke's comments came in a letter to a lawmaker on Tuesday.

Prices rose a faster-than-expected 0.5 percent even outside the volatile food and energy sectors, the most in more than a year. However, the increases in the  prices for light trucks and tobacco that lay behind that gain would not last.

Meanwhile, the Fed reported that industrial output rose 0.8 percent in November after holding steady in October as manufacturing extends its recent recovery. A more bullish attitude has many economists raising their forecasts for fourth-quarter economic growth. Goldman Sachs joined the growing ranks this week, writing to clients that economic growth would likely come in at a 4 percent annual rate, not the 3 percent pace it had been expecting.

A third report on Tuesday, however, showed a barometer of manufacturing in New York State fell unexpectedly during December, indicating the factory sector may have lost a step, while prices paid by manufacturers rose.

The Fed's report on industrial production showed capacity utilization -- the amount of the nation's industrial capacity being put to use -- rose to 71.3 percent in November from a revised 70.6 in October, its highest since last December but still well below the long-range average.

Best Buy Does Well But Offers Tepid Outlook

Best Buy issued a tepid gross margin forecast for the holidays on Tuesday, stating that improved sales growth in the fourth quarter would stem from lower-margin goods like laptops and entry-level flat screen televisions. Best Buy said it expected domestic gross margin would fall 80 to 100 basis points in the fourth quarter. While investors had seen pressure on margins as justified while it shores up market share, Best Buy's growth in the latest third quarter also fell short of expectations.

Although the firm’s market share grew by about 2.3 percent in the third quarter, that was still below the 2.7 percent increase during the second quarter. Best Buy defended its strategies as consumers hold out for bargains in a weak economy.

"We are finding a good balance between price and profit relative to the opportunities that exist in the current environment," Best Buy CFO Jim Muehlbauer said on a conference call with analysts.

While Best Buy saw strong demand for notebooks, flat panel televisions, mobile phones and appliances, sales were weak in the gaming, movies and music categories. Its gross profit rate fell to 24.1 percent in the third quarter, down 30 basis points from a year ago.  Best Buy has also upped the ante on customer service to differentiate itself, including offering its Geek Squad repair assistance to shoppers.

For fiscal 2010, Best Buy raised its profit outlook to between $3.00 and $3.15 per share, up from its prior forecast earnings of $2.70 to $3.00 a share, excluding items.

Adobe Reports Loss

After the close of regular trading on Tuesday, Adobe reported a fourth-quarter loss of $32 million, or 6 cents per share, a compared to net income of $245.9 million, or 46 cents per share for the same period a year ago. Revenues fell to $757.3 million from $915.3 million. If you exclude special items, Adobe’s earnings for the quarter were 39 cents per share.

Last month, Adobe announced plans to eliminate 680 jobs, or about 9 percent of its total workforce, in an effort to cut costs. The company said those cuts would result in $18 million to $20 million in pre-tax charges in the fourth quarter. The job cuts came in addition to a separate workforce reduction at Omniture, a Web analytics firm that Adobe acquired in October for $1.8 billion. Omniture contributed $26.3 million in revenue to Adobe's fourth-quarter results.

For its first fiscal quarter ending in February, Adobe said it now expects revenues of between $800 and $850 million, with first-quarter earnings, excluding one-time items of between 34 and 39 cents per share.