MarketView for January 5

 

 

Summary 

  

Banks led the parade on Wall Street on Thursday even as Europe struggled again, a strong indicator that the odds are for a relatively strong economy that will in turn help the U.S. outperform other markets.

 

Overall gains were small, but banks advanced for a third day, supported by better-than-expected economic data. Financial shares continued to delink from their European peers as investors see more potential for growth in U.S. lending that could offset worries about the euro zone debt crisis.

 

One winner on Thursday was Bank of America, it shares ended the day up 8.6 percent to close at $6.31.

 

Traders initially focused on heavy losses in European bank shares, led by UniCredit, Italy's largest bank, which has lost more than 30 percent of its value this week after it priced a share offering meant to shore up its ravaged balance sheet.

 

Data on Thursday pointed to a strengthening economy as twice the expected number of private sector jobs were added in December, while initial jobless claims fell by 15,000 claims in the latest week. In addition, the pace of services growth increased more than expected in December.

 

The S&P 500 closed above its 200-day moving average for a third straight day. It was the first time the index has been able to hold above the moving average that long in five months. But relatively low volumes could undermine the upbeat technical picture.

 

About 7.2 billion shares changed hands on the three major equity exchanges, as compared with last year's daily average of about 7.84 billion shares.

 

Helping the Nasdaq was the Marvell Technology Group, up 7.3 percent to close at $15.23, while Seagate Technology rose 6.4 percent to close at $17.90.

 

December same store sales rose slightly more than expected, though discounts cut into profits over the holiday shopping season. Target fell 3 percent to close at $48.51, while Macy's ended the day up 3.9 percent, closing at $33.92.

 

Dendreon rose 39.7 percent to $10.62 after its revenue increased more than three-fold as sales of its prostate cancer vaccine took off.

 

Barnes & Noble fell 17 percent to $11.24 after the company shocked investors when it said it was considering splitting off its Nook electronic reader business. At the same time the bookseller also cut its full-year earnings forecast.

 

Tesoro fell 5.9 percent to $22.60 after it forecast a fourth-quarter loss. The warning sent shares of Valero Energy and Marathon Petroleum lower.

 

Unemployment Claims Fall to 372K

 

According to a report released by the Labor Department Thursday morning, the number of people seeking unemployment benefits fell further in the final week of 2011, a positive sign for hiring one day ahead of Friday's December employment report.

 

In its release, the Department indicated that weekly applications fell by 15,000 claims to a seasonally adjusted 372,000 claims last week. It was the fourth drop in five weeks.

 

The four-week average, which reduces some of the volatile fluctuations, fell to 373,250 claims, the lowest level since June 2008. When applications drop below 375,000 -- consistently -- they generally signal that hiring is strong enough to reduce the unemployment rate.

 

The total number of people receiving unemployment insurance is currently 3.595 million, as compared to 3.617 million the week before, or a decline of 22,000.

 

Applications have declined steadily over the past three months. The four-week average fell 11 percent in 2011, evidence that companies are laying off fewer workers. But many employers have been slow to add jobs.

 

ADP Employment Report Encouraging

 

Private-sector hiring surged in December as employers added 325,000 new workers while claims for jobless benefits fell, raising hope that recent labor market improvement would continue in 2012. The ADP National Employment Report's December job tally was of considerable surprise considering that the expected number was a gain of 178,000 new workers. It was also well above the 204,000 private jobs added in November.

 

A more comprehensive government report due Friday is expected to show the economy added 150,000 public and private sector jobs last month, but the ADP report may cause some to revise that total upward.

 

A separate report from consultants Challenger, Gray & Christmas showed the number of planned layoffs at U.S. firms fell to a five-month low in November. However, John Challenger, chief executive officer, said the two sectors that suffered the most job cuts in 2011 -- government and financial services -- look destined to struggle again this year.

 

Retail Picture Mixed

 

Many retailers delivered solid sales gains for December, but heavy discounts needed to lure shoppers exacted a high price, clouding the holiday shopping season. Merchants had to mark down coats and other gifts to get shoppers to buy in a challenging economy. A mild start to winter also didn't help, wilting shoppers' appetite for cold-weather merchandise. That resulted in a string of retailers reducing their earnings outlooks.

 

The need for discounts is also raising concern about what it will take to get shoppers to spend again in coming months.

 

Retailers collectively reported a 3.5 percent increase in monthly revenue at stores open at least a year, according to the International Council of Shopping Centers' tally of 25 retailers.

 

For November and December combined, holiday sales rose 3.3 percent, a solid increase, but behind last year's 3.8 percent.

 

With shoppers sticking to tight budgets because of high unemployment and paltry wage growth, there were clear winners and losers. Limited Brands, Macy's and Nordstrom posted strong revenue gains that beat analysts' estimates. Macy's and Limited even boosted their earnings outlooks.

 

In contrast, Target, Kohl's, and J.C. Penney cut their earnings outlooks after reporting weaker-than-expected sales.

 

December's results offer an important benchmark for retailers and economists. During the holiday shopping season, merchants can make up to 40 percent of their annual revenue. The period that runs from November through December also gives valuable insights into what it takes to get Americans to spend in the weak economy.

 

Clearly, the rich kept spending, but for everyone else, it took either a hot item like the iPad or a lot of "50 percent off" signs to win over shoppers. For the semi-official start of the holiday shopping season, some stores opened Thanksgiving Day, plying shoppers with discounts that resulted in record sales. Many also plied online shoppers with free shipping and promised to match rivals' prices.

 

However, shoppers took a longer-than-usual breather after the early splurge. A mild winter and the fact that Christmas fell on a Sunday encouraged people to wait until the last minute.

 

That forced some stores to discount more than they had planned in the final days before Christmas. Post-Christmas bargains were even better. Express stores, for example, promoted an "End of Season" sale, with merchandise reduced up to 70 percent.

 

Costco's revenue at stores open at least a year rose 7 percent in December, narrowly missing Wall Street's expectations.

 

Target posted a 1.6 percent gain in December as electronics sales were weak. The company lowered its fourth-quarter earnings guidance, and its stock tumbled in

 

The discounter has faced heightened competition from Wal-Mart Stores, which brought back layaway in toys and electronics for the holiday season and is hammering its low-price message. Wal-Mart no longer reports sales on a monthly basis.

 

Among department stores, business was mixed. More expensive stores enjoyed a strong season. Nordstrom had an 8.7 percent increase in revenue at stores open at least a year. That was above the 5.1 percent forecast. Saks, which operates Saks Fifth Avenue, posted a 5.8 percent increase, meeting Wall Street estimates.

 

Macy's benefited from its efforts to tailor merchandise to local markets. It posted a 6.2 percent increase in December. The results beat Wall Street's estimate of 5 percent. For November and December combined, revenue at stores open a year rose 5.7 percent.

 

J.C. Penney and Kohl's, both of which target middle-income shoppers, had a more challenging season. Kohl's posted a 0.1 percent decline, well below Wall Street's 2.2 percent estimate.

 

Penney reported a slim 0.3 percent increase in revenue at stores open at least a year. It noted better trends in its stores during the week leading up to Christmas and increases in traffic and orders on its website during the week after Thanksgiving and the week before Christmas.

 

Among specialty retailers, Limited, the parent of Victoria's Secret and Bath and Body Works, had stellar results. Revenue at stores open at least a year rose 7 percent in December.

 

Target lowered its earnings expectations Thursday. Total revenue the five weeks ended Dec. 31 rose 2.6 percent to $10.14 billion. But the company says it now expects fourth-quarter earnings of $1.35 to $1.43 per share. That compares with prior guidance of $1.34 to $1.53 per share. Analysts expect $1.48 per share.

 

Target, based in Minneapolis, expects revenue in stores open at least a year to rise in the low- to mid-single digit percentage range.