MarketView for November 6

Summary 

 

Stocks fell sharply again on Thursday in the worst two-day slide since October 1987 with disappointing corporate outlooks and bleak sales from major retailers fueling fears of a deepening economic downturn. The Dow Jones industrial average and the S&P 500 down about 4 percent as a disappointing outlook from Cisco Systems and bleak sales from some major retailers fueled worries of a deepening economic turndown.

 

Among retailers adding to worries about the consumer's ability to keep spending, AnnTaylor and Talbots fell more than 20 and 10 percent respectively as the women's chains logged sharp declines in quarterly sales.

 

Retail chains posted the worst monthly sales data in more than three decades as consumers, beleaguered by the financial crisis, chopped spending in October.

 

Spurring economic concerns, the government said weekly jobless claims fell but were still at a level showing labor market strains a day before the October jobs payroll report on Friday, which is likely to underscore the economic challenges before President-elect Barack Obama.

 

Despite the stock market's rally on Election Day on Tuesday, it had hardly made much headway following a disastrous October. The S&P 500 index is about 1.5 percent up from its October 10 low, which marked the lowest level for stocks in more than 5 years.

 

After the closing bell, shares of Dow component Walt Disney fell 9 percent to $20.75 after the entertainment company reported quarterly profit that missed expectations. In regular trading, Disney closed at $22.81, down 5.9 percent.

 

Qualcomm also fell in after-hours trading in response to a weaker-than-expected outlook. Qualcomm was down 3.8 percent at $31.80. In regular NASDAQ trading, Qualcomm closed down 6 percent to end at $33.05.

 

During the regular session, Cisco Systems lost 2.6 percent to close at $16.94 following its announcement on Wednesday after the close that revenue could fall as much as 10 percent in the current quarter.

 

Chevron was the largest drag on the Dow, dropping 6.37 percent to $70.11 as the price of oil slid on concerns that demand will suffer during a recession. U.S. front-month oil futures settled down $4.53 at $60.77 per barrel.

 

News Corp dropped 15.6 percent to $8.26 on the NYSE after the Australian media conglomerate cut its full-year forecast.

 

Shares of General Motors were down 13.7 percent to $4.80 as auto executives were set to meet with a top lawmaker to seek urgent aid to weather the global slowdown. Ford closed down 5.3 percent at $1.98.

 

Not immune, Toyota reduced its profit forecast by half and its shares skidded 16.5 percent to $67.

 

Target fell 6.04 percent to $35.47, J.C. Penney was down 1.48 percent to $21.90 and luxury retailer Saks was down 5.3 percent to $5.16.

 

Cisco, the largest maker of networking gear, gave up 2.59 percent at $16.94, dragging along other technology bellwethers, including Apple, which was off 4.07 percent to $99.10. Cisco said after the closing bell on Wednesday that revenue could fall as much as 10 percent in the current quarter.

 

Unemployment Numbers Mixed

 

The number of workers filing new claims for unemployment insurance fell by 4,000 claims last week to 481,000 claims, according to a Labor Department report released on Thursday prior to the opening bell. The report was a clear indication that the job market remains under severe strain.

 

The department revised up its estimate for jobless claims in the prior week to 485,000 from a previously reported 479,000. A department official said there were no special factors influencing the report and noted that the impact seen in prior weeks from hurricanes that displaced some workers had now worn off.

 

A four-week moving average of claims, which smoothes out weekly variations, was unchanged at 477,000 last week. Meanwhile, those that are out of work and continuing to draw unemployment benefits hit a 25-year high, further proof of the damage from the sinking economy, ongoing credit problems and financial stresses is taking on the economy.

 

According to the Labor Department, continuing claims for unemployment benefits rose by 122,000 claims for the week ended October 25, the latest period for which the data is available, to 3.84 million. It was the highest level for that statistic since late February 1983, when the country was struggling to recover from a long and painful recession.

 

Democrats in Congress are pushing to include an extension of unemployment benefits in a new stimulus package, which could be taken up this month. Although benefits typically last 26 weeks,

Congress approved a 13-week extension of benefits in June, and the Labor Department said about 773,000 additional people claimed benefits through that program for the week ending Oct. 18, the most recent data available. That extension is scheduled to end next June.

 

Productivity Falls

 

The Labor Department reported on Thursday that worker productivity fell last quarter. According to the Department, productivity grew at an annual pace of 1.1 percent in the third quarter, down from a 3.6 percent growth rate in the second quarter. The decline came as output, declined, reflecting the hit to consumers from housing, credit and financial troubles.

 

Productivity is the amount an employee produces for every hour on the job. With productivity growth slowing, labor costs picked up. Unit labor costs, a measure of how much companies pay workers for every unit of output they produce, increased at a 3.6 percent pace in the third quarter, compared with a 0.1 percent rate of decline in the prior period. The 1.1 percent productivity gain was the smallest since the final quarter of last year, while the increase in labor costs was the largest since that time.

 

The pickup in labor costs, while welcome to workers, was faster than the 2.8 percent pace that was expected. Economists often look at labor compensation for clues about inflation. These days, however, the Federal Reserve is more concerned about the economy's feeble state. While the pick up in labor costs might raise some economists' eyebrows, the Fed is predicting inflation pressures will lessen as the economy loses traction.

 

Nation’s Retailers Are Suffering

 

The nation's retailers saw their sales fall in October to the weakest level since at least 1969, as consumers cut back sharply on spending. The stunning and rare drop, from an already weak September, is further darkening the outlook for the holiday season and raising more concerns about the financial health of the industry, which is not expected to see a recovery until at least the second half of 2009.

 

A number of stores, including J.C. Penney and Nordstrom,  cut their profit outlooks as they reduced prices on everything from coats to holiday ornaments in a desperate bid to pull in shoppers. This is going to be a do-or-die holiday season for many retailers as they try to prevent following in the footsteps of Mervyns and Linens 'N Things, both of whom were forced to liquidate.

 

However, there was one bright light shining on the sea of retail misery and it came from Wal-Mart, the world's largest retailer. Wal-Mart posted a 2.4 percent gain in same-store sales. And it is not finished. The discounter plans to cut prices on thousands of items over the next seven weeks.

 

Meanwhile, most other stores, from luxury merchants to teen retailers, suffered steep sales declines as consumers were spooked by shrinking retirement funds and volatile markets. Even warehouse club operator Costco, which sells items like TVs along with basics, posted disappointing results. Costco reported a 1 percent decline in October

 

According to the ICSC-Goldman Sachs index, retail sales fell 1 percent, the weakest October performance since at least 1969 when the index began. That compares to a 1 percent gain in September and well below the 1.8 percent average pace so far this fiscal year, which for retailers begins in February.

 

Excluding Wal-Mart, the October sales number was down 4.6 percent. The index is based on same-store sales, or sales at stores opened at least a year, which are considered a key indicator of a retailer's health.

 

Target, which has lagged behind Wal-Mart because of its heavier emphasis on nonessentials, posted a 4.8 percent drop, worse than the 2.8 percent decline that analysts had expected. "We expect the recent challenging sales environment to continue into the holiday season and beyond as a result of the economic factors currently affecting consumer spending," Target's President and Chief Executive Gregg Steinhafel said in a statement.

 

Among department stores, J.C. Penney reported a 13 percent drop in same-store sales at its department store business, worse than the 13.2 percent decline predicted. Macy's reported a 6.3 percent drop for October.

 

Luxury stores reported steep declines as affluent shoppers cut back on designer clothing. Nordstrom's 15.7 percent drop in same-store sales was worse than the 13.1 percent decline expected. Saks Inc. recorded a 16.6 percent drop, more than the 11.8 percent decrease predicted.

 

Gap reported a 16 percent drop. The retailer reaffirmed its profit outlook for the third quarter, however, as it focused on inventory control. Limited Brands reported a 9 percent drop in October, a larger decline than the 7.2 percent analysts were expecting.

 

Even teens stayed away from malls. American Eagle Outfitters reported a steeper-than-expected 12 percent drop in same-store sales, while Abercrombie & Fitch posted a 20 percent decline.

 

British and European Rate Cut

 

The European Central Bank cut its key interest rate by half a percentage point to 3.25 percent on Thursday and the Bank of England made an even more aggressive reduction of 1.5 percentage points in an effort to ease the financial crisis and boost their flagging economies.

 

The Bank of England's cut to a 3 percent base rate, its largest one-time rate reduction in 27 years, took the world’s financial markets by surprise, reflecting fears that Britain is headed for a deep recession.

 

ECB president Jean-Claude Trichet said the central bank to the 15-country euro zone had discussed a larger, three-quarter point rate cut but "after having checked and discussed the pros and cons of those different options, we decided unanimously that it was appropriate to decrease by 50 basis points," or a half percentage point.

 

Trichet said the decision to lower its rate was made in light of inflation that, while still above its preferred level of at or about 2 percent, had shown signs of slackening.

"It has been steadily declining since July, falling ... to 3.2 percent in October from 3.6 percent in September and 3.8 in August," he said, explaining the bank's decision.

 

The ECB's main mission is to keep inflation in check but cut its rates for the second time in less than a month in light of the financial crisis. Lower rates stimulate growth but can worsen inflation if done at the wrong time.

 

Trichet said the unanimous decision was made "amid the intensification and broadening of the financial market turmoil" that "is likely to dampen global and euro area demand for a rather protracted period of time."

 

Others banks followed suit. The Swiss National Bank cut its key interest rate by half a percentage point to 2 percent, only its second reduction since March 2003. In Prague, the Czech Republic's central bank cut its interest rate by three-quarter percentage point to 2.75 percent.

 

The BoE and ECB, which followed the Fed and other banks in a coordinated cut on Oct. 8, have been criticized in some quarters for being slow to respond to the sharp economic slowdown this year amid fears about inflation. The ECB actually raised rates a quarter-point in July as inflation spiked sharply higher.

 

The European Commission forecast Monday that the economy in the 15 countries that use the euro will barely grow next year, expanding just 0.1 percent, with Germany, France and Italy stagnant. And it said Britain's economy will slump by 1 percent next year.

 

Crude Prices Fall As A Reflection Of Economic Outlook

 

Oil prices fell almost 7 percent on Thursday on expectations that demand would slow further after the International Monetary Fund predicted developed economies would deliver their worst performance since World War II. The IMF said it now expected 2009 global economic growth of 2.2 percent, down 0.8 percentage point from its October forecast. It also lowered its 2009 baseline oil price projection to $68 a barrel from $100.

 

U.S. crude settled down $4.53 at $60.77 per barrel, after hitting a 19-month low of $60.16 earlier and extending Wednesday's 7 percent drop. London Brent Crude dropped $3.92 to $57.95 a barrel.

 

Government data released on Wednesday showed an unexpected rise in gasoline stocks last week, following a 2.3 percent fall in demand in the world's biggest energy consumer.

 

The slowing demand and the sharp price drop prompted OPEC to agree to cut output by 1.5 million barrels per day at an emergency meeting last month. While market sources and members of the producer group say the reductions are already being made, Venezuelan Oil Minister Rafael Ramirez said on Thursday OPEC needed to reduce output by a further million barrels per day.

 

Although the oil market has been more strongly focused on weak demand than tight supplies, analysts have said OPEC's action would provide support at some point. Meanwhile, the International Energy Agency said on Thursday the world will have to live with the risk of an energy supply crunch and an oil price well above $100 a barrel in the years to come.