MarketView for May 13

Summary 

The major equity indexes all found themselves in negative territory on Thursday as downbeat comments on the economy from the CEO of Cisco Systems put a damper on the day’s trading activity.  Cisco's warnings about a still weak labor market helped to undermine the Street’s mood, which was already on shaky ground as a result of fears of sovereign debt defaults in the euro zone. Cisco ended the day down 4.5 percent at $25.53.

It also did not help booster trading enthusiasm when a report by the Labor Department indicated that the number of individuals filing for unemployment insurance last week did not fall by the amount expected by the Street, which in turn failed to back up sharply improving monthly payrolls data and suggested the unemployment rate will remain high.

There is still a question mark over the strength of the consumer, which could prove a weak link in the economic recovery. Consumer spending accounts for two-thirds of economic activity in the United States.

After the closing bell, Nordstrom, whose results which came in below Wall Street expectations, also did nothing to inspire optimism. Nordstrom's stock fell 2.6 percent to $40.20 in afterhours trading. Also after the bell, Nvidia's sales forecast for the current quarter came in below Wall Street expectations, sending the stock down 2.5 percent to $14.28. That was despite the company’s better-than-expected earnings.

Home builders' shares also fell sharply on concerns over the sector's prospects now that a government tax credit for home buyers has expired. KB Home took the greatest hit, down 6.8 percent to $16.53.

Alcoa helped to limit the Dow's decline on expectations that aluminum's price could rise if higher Chinese electricity prices cut the global supply of aluminum. Alcoa Inc ended the day up 2.7 percent to $12.80. Century Aluminum closed up 5.1 percent at $12.69.

Tech stocks stayed in focus after the German software company SAP AG agreed to acquire Sybase for $5.8 billion. Sybase’s shares closed up 14.4 percent at $64.22, while SAP fell 0.8 percent to $44.54. However, Sony fell 5.1 percent to $31.53 after it forecast a full-year operating profit that was below expectations.

On the earnings front, Whole Foods rose 5.6 percent to $42.50, after its quarterly earnings topped estimates and it raised its full-year forecasts.

Unemployment Claims Remain High

The Labor Department reported on Thursday that Initial claims for state unemployment insurance fell by 4,000 claims to a total of 444,000 new claims for the week ended May 8, maintaining this year's modest downward trend even as other job market indicators have shown major improvements. The stickiness of the claims number, which had been expected to fall to 440,000 new claims, underscored the challenges the labor market confronts as it heals from the severe beating it took during the recession.

Federal Reserve Chairman Ben Bernanke told a conference in Philadelphia that easing tight credit conditions for small businesses was critical to bringing down the unemployment rate, currently at 9.9 percent.

Although initial jobless claims are falling only slowly, other measures of the labor market -- including the government's closely-watched monthly employment count -- suggest job growth is gaining steam as businesses become more confident of the strength of the economic recovery.

Meanwhile, President Barack Obama, whose popularity has been dented by public anxiety over the labor market, said on Thursday the economy was heading in the right direction.

"Despite all the naysayers -- who were predicting failure a year ago -- our economy is growing again. Next month it will be stronger than last month. And next year will be better than this year," Obama said.

The economy has grown for three straight quarters and while employment has risen for four months in a row, some economists worry that the slow improvement in jobless claims, if sustained, could signal slower job growth ahead.

While claims continue to grind lower, the number of people still receiving jobless benefits after an initial week of aid unexpectedly rose by 12,000 to 4.63 million in the week ended May 1, the Labor Department reported.

With unemployment still high and inflation pressures muted, the Federal should be able to keep its promise of ultra-low interest rates for an extended period, according to analysts. The tame inflation outlook was underscored by the mild rise in nonpetroleum import prices, which were up 3.3 percent in the 12 months through April.

In a second report on Wednesday, the Labor Department reported that import prices increased 0.9 percent last month on higher petroleum costs after rising 0.5 percent in March. However, excluding the volatile petroleum category, prices were up only 0.3 percent, suggesting little inflationary pressure. The department also said U.S. export prices rose 1.2 percent in April, building on the prior month's 0.7 percent advance. In the 12 months through April, export prices increased 5.7 percent, the largest gain since July 2008.

Target Takes Market Share from Wal-Mart

When Wal-Mart reports earnings next week, the Street expects the numbers to show that the retail giant is losing market share to other retailers as the economy improves going forward. At the same time, Wal-Mart’s greatest rival, Target, has been gaining at the expense of the world's largest retailer. Target also reports earnings next week and has already said that sales at stores open at least a year rose 2.8 percent in the quarter ended May 1.

Wal-Mart does not report monthly sales, but the Street is expecting that Wal-Mart’s same-store sales to be flat or down. The retailer in February forecast those sales at up 1 percent to down 1 percent, excluding the impact of gasoline sales.

With unemployment remaining high, the core Wal-Mart customer is still more skittish about spending money than consumers who are beginning to feel more stable as the economy improves. The most recent jobless claim data on Thursday showed only a slight drop in the latest week. At the same time, consumers who have held onto their jobs and enjoy a higher income bracket have become more willing to buy items like clothes and home furnishings, a shift that helps Target.

In the first quarter, retailers like Target and Macy's saw rising same-store sales. Meanwhile, Wal-Mart has focused even more on cash-strapped consumers in recent weeks, cutting prices on thousands of items, especially everyday items like food. At the same time, Target is launching a new advertising campaign, putting more emphasis on discretionary items like apparel, though it is also spotlighting low prices on everyday items.

Both discount retailers are expected to post higher earnings per share before one-time items. In February, Wal-Mart’s guidance was for 81 to 85 cents per share, and $3.90 to $4.00 a share for the year.

For Target, due to report on Wednesday, the expectation is for 86 cents per share for the quarter. The company said last week that earnings would meet or exceed the average analyst estimate.

Wal-Mart trumped Target and other retailers during the recession as consumers spent only on essentials and new customers sought out Wal-Mart's low prices. However, as the economy recovered, spending patterns shifted to a degree that has also shown up in Wal-Mart and Target share prices. Since the beginning of the year, Target shares are up more than 15 percent, while Wal-Mart is down more than 1 percent.