MarketView for November 5

 

 

Summary  

 

It was another 200 point day for the Dow Jones industrial average on Thursday with the other indexes turning in relative gains of a similar ilk as economic data pushed confidence in the recovery skyward, aided by some strong results from Cisco Systems. The Cisco numbers suggested a rebound in technology spending. Cisco ended the day up 2.8 percent to close at $23.93, a day after it posted a stronger-than-expected profit and said business was recovering.

The market's advance was broad-based, and the Dow ended above 10,000 for the first time in two weeks.

 

The latest economic data indicated that non-farm productivity rose more than expected in the third quarter as companies managed to squeeze even more output from a smaller pool of labor. A separate report showed fewer new filings for unemployment insurance, with the number hitting a 10-month low. The government is scheduled to release its key monthly jobs report on Friday morning.

 

Looking at some key results, shares of DuPont were up 3.7 percent to $33.38 after its chief executive outlined plans for growth in 2010 and after. CVS Caremark fell 20.1 percent to $28.87 after comments from Chief Executive Tom Ryan on weakness in the pharmacy benefit management business. After the bell, shares of Starbucks rose 1.5 percent to $20 as it posted quarterly results.

 

Retailers reported a rebound in October sales from the lows in the previous year, but more than half missed Wall Street's increased expectations as consumers continue to dole out dollars carefully as we head into the holiday shopping season.

 

Productivity Continues to Advance

 

Worker productivity grew at its fastest pace in six years during the third quarter and new claims for jobless aid fell to a 10-month low last week, suggesting the labor market may be starting to bottom out.

 

According to a report by the  Labor Department, productivity rose at a 9.5 percent annual rate, the fastest pace since the third quarter of 2003, as companies squeezed more output from a smaller pool of labor to hold the line on costs.

 

The Labor Department also reported that initial claims for state unemployment benefits dropped to 512,000 in the week ended October 31, the lowest level since early January. Some healing of the labor market is crucial to sustaining and strengthening the economy's recovery after its worst recession in 70 years, with employment key to underpinning consumer spending.

 

The biggest question facing industry at the moment with regard to its labor pool is whether the rapid growth rate in productivity, which measures the hourly output per worker, can be sustained. If it cannot, which is the consensus of opinion, then companies will soon have to begin adding workers in order to meet the demand for their goods and services.

 

Unit labor costs, a measure of the cost of labor for any given amount of production, fell 5.2 percent last quarter after declining 6.1 percent the previous period. Analysts had forecast a drop of only 4 percent.

 

Productivity in manufacturing rose at a record 13.6 percent rate in the third quarter, likely driven by automakers ramping up production to rebuild depleted stocks after the popular "cash for clunkers" program pushed sales higher. Compensation per hour rose at a 3.8 percent pace, but after adjustment for inflation it was up only 0.2 percent -- pointing to sluggish growth in income.

 

In the weekly jobs claims report, the four-week moving average for new benefit claims slipped 3,000 to 523,750 last week, the lowest in almost 10 months. The average, which is seen as a better gauge of underlying trends, has declined for nine straight weeks.

 

Still, claims remain high and need to drop below 400,000 to signal that the economy is creating jobs.

 

While the Labor Department is expected to report on Friday that the decline in employment slowed further in October, the jobless rate is expected to rise to 9.9 percent, up from a 26-year high of 9.8 percent in September.

 

There were further hints of labor market improvement in the data on Thursday. The number of people still on the jobless benefit rolls after collecting an initial week of aid dropped to the lowest level since March in the week ended October 24, the latest week for which data was available.

 

Retail Sales Improve But Are Far From Ideal

 

More than half of all retail chains posted October sales that fell short of expectations, raising doubts about a widespread recovery for the holiday season. Department store chains and teen retailers in particular disappointed investor expectations, while such disparate companies as apparel retailers Gap and Saks performed better than hoped as consumers return to spending selectively.

 

Retail shares reflected the mixed results. Teen retailers Aeropostale and American Eagle Outfitters fell 13.6 percent and 12 percent, respectively. Mid-priced department store J.C. Penney fell 6.5 percent and Kohl's shed 2.9 percent, while Saks gained 1.8 percent.

 

Industry forecasts for the holiday season range from a slight decline for retail sales to a slight increase, and many insiders say it is difficult to reach a firm prediction. In the most bullish of forecasts to date, the International Council of Shopping Centers said on Thursday it expects retail same-store sales to rise 5 percent to 8 percent in November. It has forecast holiday same-store sales to rise 1 percent.

 

However America's Research Group says total retail sales will most likely fall 2.9 percent during the season as a whole, according to a forecast issued on Thursday.

 

Sales were expected to improve from last year, when consumers all but stopped spending in the face of a financial crisis. Total October same-store sales rose 1.8 percent. Fifty-two percent of retailers came in below expectations while 44 percent beat forecasts.

 

Nonetheless, the data still marked the strongest showing since June 2008, when sales rose 1.9 percent. Last October, same-store sales plunged 4.1 percent. While sales may be disappointing, many retailers have slashed inventory to help protect profits.

 

For instance, TJX posted a 10 percent increase in same-store salesbut said it now expects per-share earnings for the third quarter to be at or slightly above its recently raised range of 77 cents to 79 cents.

 

Aeropostale now expects to earn 90 to 91 cents per share in the third quarter, up from its prior view of 84 cents to 85 cents per share.

 

J.C. Penney's same-store sales fell 4.5 percent but it raised its view for third-quarter earnings to 10 cents to 11 cents per share, from a prior view of 3 cents to 10 cents per share.

 

Fannie Mae Posts Loss

 

Fannie Mae, the largest provider of funding for home loans, said on Thursday bad mortgages and a federal foreclosure prevention program left it with a $18.9 billion loss, forcing it to tap the Treasury again to plug a hole in its net worth. Fannie Mae said the quarterly loss stemmed from $22 billion in credit-related expenses. These included charges on mortgages it bought out of securities as it modified loans under President Barack Obama's foreclosure prevention plan. The company also increased its provision for credit losses in future quarters, and said it expects those impairments to increase this quarter and through 2010.

 

The assessment is dire for the housing market that has appeared to post a fragile recovery over the past several months with a rebound in home sales and prices in some regions. The company's expectations of future losses and need for Treasury cash complicate the issue of how to extricate it from taxpayer support, while also trying to prevent a more serious fallout in U.S. housing.

 

Fannie Mae said much of its energy in the third quarter went to implementing Obama's Making Home Affordable Program. Under the program, mortgage companies are urged to refinance or modify loans for homeowners facing foreclosure. However, the program also means that Fannie Mae and rival Freddie Mac, which guarantee a vast portion of U.S. mortgages, must extract the loans from securities and often recognize a loss. Serious" delinquencies 90 or more days past due, or in foreclosure, increased as the company urged mortgage servicers to seek ways to keep borrowers in their homes. Rising unemployment prevented borrowers from finding alternatives, it said.

 

Including $883 million in dividends paid on preferred stock already owned by the government, Fannie Mae's loss attributed to common shareholders grew to $19.8 billion. That compares with a loss of $15.2 billion in the second quarter. Net revenue climbed to $5.9 billion in the third quarter from $5.6 billion in the second quarter, the company said.

 

The Federal Housing Finance Agency, Fannie Mae's regulator, has requested $15 billion from the Treasury under a senior preferred stock agreement, which will increase the total government support to $60.9 billion. "We expect to have a net worth deficit in future periods, and therefore will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement," Fannie Mae said in a statement.

 

Fannie Mae said continued government support is essential to its access to the debt markets, where it raises money to support loans through its $793 billion portfolio. Currently strong demand for its debt could decline if the Treasury does not extend or replace its credit facility after December 31, and as the Federal Reserve ends its purchase program.

 

The Washington-based company also said it is waiting for the U.S. Treasury to approve a deal to transfer low income housing tax credits with a carry value of $5.2 billion to unnamed investors.

 

The Wall Street Journal has reported that Goldman Sachs Group is in talks to buy tax credits from Fannie Mae but Treasury is wary about approving a deal that would help the bank reduce its tax bill. The FHFA has told the housing finance company it does not object to transferring the tax credits, which are incentives designed to spur investment in low-income housing.