MarketView for February 5

Summary

Stock prices showed some momentum on Thursday, sending the three key equity indexes well into positive territory with the Dow Jones industrial average coming off its lowest point since Nov. 2. The rise in the markets was partly based on the hope that the bailout of the financial system will include a change in accounting rules that would stem bank write-downs and spur lending.

The S&P 500 is now off 6.4 percent since the start of 2009, but has risen 12.4 percent since the bear market low hit in November. The Obama administration is due to announce its bank rescue plan next week. Meanwhile, Bank of America ended the day up 3 percent at $4.84, while JPMorgan closed up 2.1 percent at $24.54.

 A solid January sales report from Wal-Mart, coupled with better-than-expected reports from several other retailers added to the day’s positive tone. Wal-Mart was the top performer among the companies making up the Dow, closing up 4.6 percent at $48.56.

A day before the release of the January non-farm payrolls report, investor sentiment received a boost from talk that Washington would suspend an accounting requirement on the recognition of losses that has resulted in billions of write-downs for banks.

There was also encouraging news on the earnings front on Thursday, as Akamai Technologies posted quarterly earnings and revenues that exceeded Street expectations, sending its shares up 18.1 percent to $16.73.

Apple and Cisco Systems were higher for the day on the hope that any bailout of the banks will require increased lending, which in turn will translate to an increase in both consumer and business spending.

Apple added 3.1 percent to close at $96.46 to become the top performer on the NASDAQ, while Cisco rose 3.2 percent to $16.35 after the disappointment on Wednesday with the company's revenue outlook for the current quarter had dissipated.

Companies in the basic materials sector rose on higher metals prices, with Alcoa Inc (AA.N) up 3.1 percent to $8.06. Miner Freeport McMoRan ended the day up 3.9 percent to close at $28.35.

Jobless Claims Rise Sharply

Claims for jobless benefits hit a 26-year high last week and factory orders dropped sharply during the month of December. In addition, the number of people staying on the jobless benefit rolls hit a record high late last month.

According to the report released by the Labor Department on Thursday, first-time claims for state unemployment insurance benefits rose by 35,000 claims to 626,000 for the week ended January 31, making it the highest number since October 1982.

The housing-led downturn is having a devastating impact on jobs, further squeezing households whose net worth has also sorely eroded by the stock market collapse. The reduction in spending by consumers has resulted in companies responding with continuing payroll reductions. The result is that the number of unemployed drawing benefits after an initial week of aid has reached a record 4.79 million for the week ended January 24, the latest week for which the data is available.

The data was released ahead of a closely watched government report on employment due out on Friday. That report is expected to show job losses accelerated last month. A report on Wednesday suggested the private sector purged 522,000 jobs last month.

Factory Orders Drop Sharply

The Commerce Department reported on Thursday that new factory orders fell 3.9 percent in December, the fifth consecutive monthly decline. For all of 2008, factory orders were up just 0.4 percent, the weakest showing since 2002. Orders for so-called durable goods, items meant to last three years or more, slid 3 percent in December, a bit steeper decline than first reported last week.

However, there remains an increase in productivity among factory workers. The reduction in jobs that took place last quarter trimmed the total number of hours employees worked, thereby increasing productivity.

A separate report by the Labor Department indicated that non-farm productivity rose at a 3.2 percent annual rate in the fourth quarter, but output fell 5.5 percent, the largest drop since 1982. Hours worked outside the farm sector fell at an 8.4 percent annual rate in the fourth quarter, the largest drop since the first quarter of 1975.

Within the manufacturing sector, hours worked fell14.1 percent. Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, rose 1.8 percent for the fourth quarter. Diminishing inflation pressures boosted hourly compensation by a 15.6 percent annual rate during the fourth quarter, the largest increase since the series started in 1947.

Retail Sales Decline

Retailers reported lower monthly sales for January, although Wal-Mart managed an opposite result posting a stronger-than-expected increase as consumers shopped for the best bargains possible. Wal-Mart's sales at stores open at least a year rose 2.1 percent, excluding gasoline. Excluding Wal-Mart, the decline was 5.7 percent, with apparel chains like Gap and department store operators like Saks Inc posting the sharpest drops. Wal-Mart shares rose 4.3 percent as a result.

Retailers as a whole posted a 1.8 percent same-store sales decline in January,. The International Council of Shopping Centers forecast that U.S. same-store sales will drop 1 to 2 percent in February. The group said it expects sales to stay "sluggish" for six months, but sees the rate of decline moderating later this year.

However, Wal-Mart also indicated that it would no longer issue monthly sales forecasts because of volatile consumer habits. Instead, Wal-Mart will provide forecasts on a 13-week basis, four times a year. Pacific Sunwear and Chico's also said they would stop reporting monthly same-store sales.

Although deep discounting attracted some shoppers, cooler temperatures slowed traffic in parts of the United States. A drop in gift-card use during January, typically a month driven by clearance sales, also contributed to the weakness.

Nonetheless, a few retailers, such as Gap, Macy's, Aeropostale, Ross Stores and TJX, raised their profit forecasts.

Among clothing chains, standouts included Aeropostale’s 11 percent, same-store sales rise and American Apparel, which managed a 2 percent sales gain for January on top of a year-earlier 40 percent increase. Aeropostale shares were up 7.7 percent, Gap gained 6 percent and TJX advanced 10.7 percent. Macy's rose 5.4 percent.

The worst performers included Children's Place, with same-store sales down 11 percent, and American Eagle Outfitters, which posted a 22 percent decline. Department stores continued to ring up declines as mall traffic and demand for luxury goods suffered.

Talbots, which has struggled with declining sales as women over 35 pull back on purchases, announced that it will close stores and cut corporate jobs. The retailer also said it got a $200 million loan from a majority shareholder that it will use to pay off debt.