Tuesday morning saw Wall Street turned solidly bullish, putting the Dow on track to close at its best level since September 2008, as traders cheer upbeat data on retail sales and show no jitters ahead of the Federal Reserve's interest rate decision.
Aside from a stronger-than-expected increase in November retail sales, Wall Street was paying attention to a new report on wholesale inflation and plunging shares of Best Buy (BBY).
The upbeat retail sales report has “stoked some optimism that the recovery is solidifying,” said Nick Kalivas, vice president of financial research at MF Global. “You really haven’t seen the weakness of Best Buy permeate the market.”
The U.S. markets looked ahead of the conclusion of the Fed’s policy meeting, which isn’t expected to produce any major new developments on the monetary policy front.
The upbeat start comes after a late-day slide derailed the Nasdaq Composite's eight-day winning streak and prevented the Dow from closing at its highest level since September 2008. The blue chips have to close above 11444 to clinch new 2010 highs.
The Dow landed at its highest level since September 2008 on Tuesday, but an early rally faded as the Fed’s policy meeting proved to be a nonevent and Treasury yields hit seven-month highs.
Investors found little reason to jump into the fray after the Fed kept rates steady and left its bond-buying plan alone. The late-day selloff from session highs, Wall Street’s second in as many days erased much of an 86-point rally on the Dow that had been fueled by stronger-than-expected November retail sales.
“The market was due for a pause and people are using the nothing new from the [quiet Fed meeting] to take some chips off the table. The risk-off trade has been gaining some momentum,” said Michael James, managing director of equity trading at Wedbush Securities.
The selling coincided with a slide in the bond market in the wake of the Federal Reserve deciding to keep interest rates at their historically low levels, as expected. The yield on the 10-year note settled near its highest level since May.
“For the first time in this whole multi year experiment on the part of the Fed, the bond market has taken over and has pushed back against the Fed's goal and desire of keeping interest rates low,” Peter Boockvar, equity strategist at Miller Tabak, wrote in a note.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA) has added more than 50 points so far this morning, as the blue chip barometer threatens to break above the 11,500 level for the first time since Oct. 3, 2008.
Wall Street is cheering stronger-than-expected November retail sales, though rising producer prices and a disappointing quarterly report from Best Buy Co. Inc. (BBY) are constraining the bulls as we head into the latter half of the session.
What's more, investors are also positioning themselves ahead of the 2:15 p.m. Federal Open Market Committee statement on U.S. monetary policy.
The Dow Jones Industrial Average (DJIA – 11,476.54) finished with a gain of 47.98 points, or 0.42%.
The S&P 500 Index (SPX – 1,241.59) had a gain, on the day, of 1.13 points, or 0.09%.
The Nasdaq Composite (COMP – 2,627.72) had a gain of 2.81 points, or 0.11%.
The Russell 2000 Index of smaller companies had a loss of 0.58 points, or 0.08%, to settle at 771.52.
The Dow closed at its highest level since September 3, 2010, joining its peers by making fresh 2010 highs. Most of the benchmark index's 30 stocks made headway, led by defensive plays AT&T (T) and Kraft (KFT). The index's weakest links were JPMorgan Chase (JPM) and Coca-Cola (KO).
The Nasdaq Composite, which had its eight-day win streak snapped on Monday, closed virtually unchanged as gains from Amgen (AMGN) were offset by weakness in some tech stocks like Research in Motion (RIMM).
With trading volume still anemic, the afternoon's drop could be a sign that the major indexes have hit the upper range of a rally that has propelled them all to recent two-year highs.
About 13 stocks rose for every 17 that fell on the New York Stock Exchange, while on the Nasdaq an equal number of stocks rose and fell.
About 7.2 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq, well below the year's daily average of 8.61 billion.
Notes of Interest….
The Dow Jones Industrial Average (DJIA) closed at its highest level since September 3, 2010, joining its peers by making fresh 2010 highs.
The Dow tacked on about 48 points, or 0.4%, after earlier touching a 27-month peak of 11,514.08.
• The S&P 500 Index’s (SPX) briefly fell into the red in afternoon trading, but recovered to close on a slim gain of 1.1 points, or 0.09%.
Today was the SPX's best daily close since Sept. 19, 2008.
• The Nasdaq Composite (COMP) bounced back from its own trip below the breakeven line, ending the day up 2.8 points, or 0.1%.
Unlike its peers, though, the COMP failed to set a fresh two-year closing high, falling short of Friday's finish at 2,637.54.
• Crude futures pulled back today, despite early gains. The commodity caught an early lift from the day's stronger-than-expected retail sales data, which was interpreted as a sign that consumer spending is on the upswing. However, the Fed's comments about disturbingly high unemployment put a damper on that initial enthusiasm. By the close, crude oil for January delivery was down 33 cents, or 0.4%, at $88.28 per barrel.
• Gold futures collected a modest gain today. The precious metal capitalized on its status as an inflationary hedge as traders learned of a larger-than-forecast increase in wholesale prices during November. Gold for February delivery added $6.30, or 0.5%, to finish at $1,404.30 per ounce. Following the FOMC announcement, the malleable metal continued to inch higher in electronic trading.
• Bonds: The price on the benchmark 10-year U.S. Treasury edged down slightly, pushing the yield up to 3.44%.
Sales at U.S. retailers rose more than expected in November as consumers splurged on clothing and other items at the start of the holiday season and receipts at gasoline stations surged, more evidence the economic recovery gathered steam in the fourth quarter.
The Commerce Department said on Tuesday total retail sales increased 0.8%, advancing for a fifth straight month. Sales for October were revised up to 1.7% from a previously reported 1.2% gain.
Economists polled by Reuters had expected retail sales to increase 0.6% last month. Compared to November last year sales were up 7.7%.
Excluding autos, sales rose 1.2% last, exceeding economists' expectations for a 0.6 % gain. Sales excluding autos increased 0.8% in October.
The data was the latest to imply an acceleration in economic growth during the current quarter after output expanded at a 2.5% annual pace in the July-September period.
However, it will probably not be strong enough to discourage the Federal Reserve from completing its $600 billion government debt buying program intended push already low interest rates further down and stimulate demand.
Policymakers from the U.S. central bank meet on Tuesday to assess the economy and are widely expected to stay the course of accommodative monetary policy.
Sales last month were buoyed by a 2.7% rise in receipts at clothing and clothing accessories stores, the largest increase since March. Consumers also spent on non-essential goods, lifting sales at sporting goods, hobby, book and music stores 2.3%, the biggest gain in almost a year.
Sales were also boosted by a 4% jump in receipts at gasoline stations, which was the largest gain in a year. But motor vehicle sales surprisingly fell 0.8%, while building materials dipped 0.1% after rising 3.3% in October.
Core retail sales, which exclude autos, gasoline and building materials, rose 0.9% after a 0.5% gain in October. Core sales correspond most closely with the consumer spending component of the government's gross domestic product report. Spending, which accounts for 70% of U.S. economic activity, increased at a 2.8% annual rate in the third quarter.
Producer Price Index
U.S. producer prices rose more than expected in November as energy prices spiked, but underlying inflation pressures remained subdued, according to Labor Department data released on Tuesday.
The producer price index, a measure of business costs, rose 0.8% last month, above forecasts for a 0.6% gain in a Reuters poll. Compared to the same month a year earlier, the PPI climbed a robust 3.5%.
Core producer prices -- which are favored by Federal Reserve policymakers because they exclude food and energy prices that are considered more erratic -- rose 0.3%, above estimates for a 0.2% increase. The yearly gain was 1.2%.
The Fed holds its regular policy meeting on Tuesday and is not expected to make any shifts to its policy of buying an additional $600 billion in government bonds to stimulate a frail economic recovery amid high unemployment and low inflation. Fed Chairman Ben Bernanke has indicated he would like to see inflation running at about 2% or a bit below.
The report highlighted the dissonance between the inflation measures used by policy officials and the everyday experience of businesses and consumers. Gasoline costs jumped 4.7% while the price of fruit soared 13.6%.
U.S. business inventories rose less than expected in October as sales increased at their fastest pace in seven months, a government report showed on Tuesday.
The Commerce Department said inventories rose 0.7% to $1.42 trillion, the highest level since February 2009, after increasing by an upwardly revised 1.3% in September.
Economists polled by Reuters had forecast inventories rising 1% after a previously reported 0.9% increase in September.
Inventories are a key component of gross domestic product changes and have been a key driver of growth as the economy recovers from the worst downturn since the Great Depression of the 1930s.
But the rate of inventory accumulation is expected to slow somewhat in the quarters ahead and make a limited contribution to GDP growth.
Business sales increased by 1.4% to $1.12 trillion in October, the highest level since September 2008, after rising 0.8% the prior month. The percentage increase in sales last month was the largest since March.
The sales pace left the inventory-to-sales-ratio, which measures how long it would take to clear shelves at the current sales pace, at 1.27 months from 1.28 months in September.
The Federal Open Market Committee Report
The U.S. Federal Reserve said on Tuesday the economic recovery was still too slow to bring down unemployment, reaffirming its commitment to purchase $600 billion in bonds to stimulate growth and create jobs.
In a statement that contained remarkably little acknowledgment of a recent uptick in the economic data, the Fed characterized the U.S. expansion as "continuing," a modest upgrade from its November description of the recovery as "slow."
While the meeting likely involved some reevaluation of the economic outlook to account for the effects of proposed new tax cuts, the Fed noted measures of underlying inflation had continued to trend lower since its last meeting.
"The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment," the Fed said in a statement at the conclusion of a one-day meeting.
Kansas City Fed President Thomas Hoenig again dissented against the move.
Early last month, the Fed launched a controversial program to buy $600 billion in longer-term Treasury securities by the middle of next year to support a weak economic recovery that was failing to generate jobs.
Called QE2 because it is the Fed's second round of so-called quantitative easing through asset purchases, the initiative was assailed by critics concerned it could trigger inflation or set off a round of competitive currency devaluations by weakening the dollar.
Since the central bank launched the program, data on the economy has turned brighter. Strong November retail sales data on Tuesday added to evidence the recovery is gaining strength.
In addition, a deal between the White House and congressional Republicans to extend Bush-era income tax cuts included a surprise reduction in payroll taxes, which would provide an unexpected boost for the economy. Some forecasters said the deal could lift growth next year by as much as a full percentage point.
Policymakers are also likely to have pondered a spike in longer-term interest rates, a development that runs counter to the Fed's intended goal for the asset purchases, which are aimed at lowering borrowing costs. Yields on the benchmark 10-year Treasury are at highs not seen since May.
It is difficult to gauge, however, how much of that rise is due to political criticism from of QE2, which may have led investors to question the Fed's appetite for sticking with the easing program, how much is due to worries about inflation and the massive U.S. debt, and how much can be pinned to expectations of stronger growth.
Despite signs the recovery may be picking up steam, the unemployment has hovered near a lofty 10 percent for months and core inflation has been running at record lows.
In currencies: The dollar rose against the euro, the British pound and the Japanese yen.
European Markets ended the session mixed. Britain's FTSE 100 rose 0.5%, while Germany's DAX slid less than 0.1%. The CAC 40 in France gained 0.3%.
Asian Markets ended higher. The Shanghai Composite added 0.1%, the Hang Seng in Hong Kong gained 0.5%, and Japan's Nikkei rose 0.2%.
Company Earnings Reports and News
Best Buy (BBY)
Best Buy (BBY) revealed unexpected declines in third-quarter profits and revenues on Tuesday and took an axe to its guidance, sparking a 13% plunge in the electronics retailer’s stock.
The Richfield, Minn.-based retailer said it earned $217 million, or 54 cents a share, last quarter, compared with a profit of $227 million, or 53 cents a share, a year ago. Analysts had called for EPS of 61 cents.
Revenue slid from $12.02 billion to $11.89 billion, trailing the Street’s view of $12.45 billion. Same-store sales declined 3.3%, compared with a rise of 1.7% in the same period a year earlier. Gross margins increased from 24.5% to 25.1%.
“While sales were lower than we expected during the quarter, I’m pleased with our strong store execution, solid gross margin expansion and efforts to control costs,” CEO Brian Dunn said in a statement.
Best Buy also downgraded its fiscal 2011 guidance due to poor visibility and the third-quarter results, projecting EPS of $3.20 to $3.40. Even the upper end of that new view would widely miss the Street’s view of $3.59. Previously Best Buy forecasted EPS of $3.55 to $3.70.
The company also said its domestic market share declined by 1.10 percentage points last quarter and it sees its domestic market share shrinking in fiscal 2011.
“Based on lower than expected sales and earnings in the fiscal third quarter, and given our current visibility to potential outcomes in the fiscal fourth quarter, we now expect annual earnings to be below our previous fiscal 2011 EPS guidance,” said Jim Muehlbauer, Best Buy’s chief financial officer.
Shareholders punished Best Buy for the gloomy results and gloomier guidance, sending its stock down 13.31% to $36.13 ahead of Tuesday’s open. Best Buy was up almost 6% on the year as of Monday’s close.
Sanderson Farms Inc (SAFM)
Sanderson Farms Inc (SAFM) reported a much higher-than-expected quarterly profit as it sold more chicken at higher prices, sending its shares up more than 5 percent.
Sanderson, like other chicken growers, has been increasing production. Its new Kinston, North Carolina, plant will start processing chickens in January.
For the fourth quarter ended Oct. 31, breast meat prices were up 26 percent from a year earlier, the company said in a statement. Sanderson also benefited from lower soybean meal prices, one of the primary feed ingredients.
The company said fourth-quarter earnings had risen to $47.8 million, or $2.08 a share, from $19.8 million, or 95 cents a share, a year earlier. Analysts on average expected $1.72 a share, according to Thomson Reuters.
Sales rose 13 percent to $529.1 million, beating analysts' expectations of $521.1 million.
Shares of Sanderson rose 5.2 percent to $44.71 in premarket trading.
Company News and Movements
• Wall Street managed to mostly shrug off Best Buy, which tumbled 13% after posting unexpected declines in third-quarter profits and sales and taking an axe to its guidance. Even the upper end of the electronics retailer’s fiscal 2011 outlook would trail the Street’s view by 19 cents a share. Shares of RadioShack (RSH) also lost ground on the news.
• Yahoo! (YHOO) is poised to cut as many as 650 jobs, or nearly 5% of its workforce, as early as Tuesday, The Wall Street Journal reported.
• Amgen (AMGN)rallied nearly 3% after the biotech drug maker said a late-stage trial study of its cancer drug Xgeva showed it helped patients live considerably longer with prostate cancer than a placebo.
• HCP (HCP) gobbled up most of the real-estate assets from nursing and assisted living center company HCR ManorCare for $6.1 billion, marking one of the biggest land grabs of 2010. The transaction also represents one of the biggest private-equity deals of the year as HCR ManorCare is controlled by private-equity giant Carlyle Group.
Corning Inc. (GLW)
A positive assessment in Barron's drew some attention to Corning Inc. (GLW) on Monday. The high-tech glass maker has traditionally been dependent on television sales, which tend to be cyclical. However, a UBS analyst quoted in this article contends the TV business is changing. Families are no longer keeping their TVs for nine or 10 years; instead, middle class homes are buying more and larger TVs and replacing them more often.
Moreover, Corning's Gorilla Glass, a tough, scratch-resistant sheet compatible with touch-screen functions, is increasingly being used in mobile devices (think Apple Inc.'s iPad) as well as TVs.
The analyst quoted in the article thinks Corning shares could rise to about 25 from their recent 19, as the TV market stabilizes and new products come on line.
Options players jumped on the shares of Corning (GLW) on Monday, as more than 57,900 contracts changed hands. This surge in volume was more than three times the stock's average trading volume of 15,444 contracts, according to data from WhatsTrading.com. In addition, traders were feeling optimistic, as 83% of the volume changed hands on the call side.
In fact, the International Securities Exchange (ISE) has seen more than three calls purchased to open for every one put purchased to open during the past 10 trading sessions. This ratio of calls to puts is higher than 75% of all the readings taken during the past year.
On the other hand, the put/call open interest ratio (SOIR) is still far from an optimistic reading. The ratio comes in at 0.82, which is higher than 96% of all those taken during the past year. A shift in sentiment among options players to the optimistic end of the spectrum could result in fresh buying pressure for the shares.
Meanwhile, Wall Street is smitten with the shares. According to Zacks, the stock has earned 13 "buy" ratings and five "holds."
Technically speaking, the shares of GLW are roughly flat on the year. However, the security is attempting a rebound. The stock has bounced from its September 15.50 low and climbed along its 10-day and 20-day moving averages. The equity has even broken through former resistance at the 19 level.
Apple Inc. (AAPL)
Apple Inc. (AAPL), whose coveted iPad was featured on Oprah's 40-plus item list, has been doing quite well lately, recently breaking out from a period of consolidation to tag a series of all-time highs. In fact, just today, the tech king rallied to a brand-new record high of $325.06. This current uptrend has been underlined by strong support from its 10-day and 20-day moving averages -- which recently completed a bullish cross, suggesting that the tech issue may have more fuel remaining in its rally.
Today's technical feat may have been inspired by a bullish brokerage note from Goldman Sachs. This morning, the brokerage firm re-initiated coverage of AAPL with a "buy" rating, citing continued revenue growth from the company's hot-selling iPad device. Overall, most analysts agree with Goldman; according to Zacks, 59 out of 62 brokerage firms rate AAPL a "buy" or better.
However, option players aren't as convinced of AAPL, as evidenced by the equity's put/call open interest ratio (SOIR) of 1.00, which ranks above 84% of all other readings taken during the past 12 months. In other words, short-term traders have been more pessimistically aligned toward AAPL only 16% of the time during the past year.
In fact, a quick look at AAPL's December open interest configuration confirms this bearish sentiment. Peak put open interest of nearly 35,000 contracts can be found at the 280 strike, and the 300, 310, and 320 strikes each house substantial amounts of puts. With AAPL hovering comfortably around $325, all these puts are easily out of the money. As expiration nears, an unwinding of the hedges related to these puts could create a tailwind for AAPL, sending the iPad issue even higher on the charts.
The following companies also had some impressive options movements :-
Comcast Corporation (CMCSA)
The brokerage bunch has taken a shine to Comcast Corporation (CMCSA) today, with the cable company receiving a duo of upbeat analyst endorsements this morning. Specifically, Bernstein raised its outlook on CMCSA to "outperform" from "market perform," and also increased its price target to $26 from $20. Meanwhile, Nomura initiated coverage of CMCSA with a "buy" rating and $25 price target.
The brokerage bunch is generally mixed toward CMCSA, with Zacks reporting that 14 analysts call the stock a "buy" or better, while 12 maintain a "hold" rating on the shares. Going forward, CMCSA could benefit from additional upgrades and/or price-target increases from the remaining skeptics.
Technically speaking, CMCSA has been on a tear lately. After a nice rally back in October, CMCSA entered into a period of consolidation in the $20 to $21 neighborhood. Last week, the shares bounced off their 10-day trendline, and have since tagged a series of fresh annual highs. In fact, just today CMCSA rallied to a new 52-week peak of $22.37.
The stock's recent technical feat could come as music to option players' ears. In the soon-to-expire December series of options, peak call open interest of nearly 24,000 contracts can be found at the 21 strike, with the 20 strike carrying another 12,000 calls in open interest. Given the stock's current perch around $22.34, both of these calls are in the money.
Other Options News
• Bearish activity detected in Nuance Communications (NUAN), with 7005 puts trading, or 19x the recent average daily put volume in the name.
• Bullish flow detected in Colgate Palmolive (CL), with 8718 calls trading, or 4x the recent average daily call volume in the name.
• Bullish flow detected in BMC Software (BMC), with 17828 calls trading, or 6x the recent average daily call volume in the name.
• Increasing volume is also being seen in BP, Best Buy (BBY), and Target (TGT).
On Monday, stocks finished a lackluster session mixed as investors mulled a flurry of corporate deals; and as the tax deal cleared a key Senate procedural hurdle.
Tuesday, markets regained the momentum from the prior week. Stocks climbed, with the S&P 500 reaching its highest level in two years on Friday.
"Investor sentiment is still positive, as we've been seeing a strong commitment to equities," said Matt King, chief investment officer at Bell Investment Advisors. "Today's retail sales are a good sign that the consumer is coming back."
King expects consumer spending and corporate retail sales to remain strong into the holiday shopping season, which will boost investor confidence and continue to lift markets.
An extension of the Bush-era tax cuts would keep cash in the wallets of Americans. Since consumers are responsible for the lion's share of spending in the U.S., confident consumers willing to spend is key to an economic recovery.
Stocks had rallied out of the gate Tuesday morning, following a better-than-expected retail sales report from the U.S. Commerce Department, and held onto gains for most of the afternoon.
"Today's retail sales are a good sign that the consumer is coming back," said Matt King, chief investment officer at Bell Investment Advisors.The market lost traction as stocks headed into the close but "investor sentiment is still positive," King said.
Wall Street mostly yawned at the Fed's policy statement, which showed the central bank voted 10-1 to keep interest rates at their ultra-low levels. The central bank also didn't announce any changes to its controversial $600 billion quantitative easing plan, which is aimed at boosting the economy and avoiding a deflationary spiral by lowering interest rates.
The recovery is continuing, "though at a rate that has been insufficient to bring down unemployment", the Fed said in its policy statement.
Yet the Fed's inability to keep interest rates from rising was on display immediately after the meeting ended, with the yield on Treasurys hitting seven-month highs. The selloff in the bond market is partly a reflection of increased optimism about the economic recovery. However, it is also likely to have a dampening effect on the fragile economy by increasing borrowing costs for companies and individuals.
“Equity investors are finally paying a little more attention to the hammering going on in the bond market,” said Michael James, managing director of equity trading at Wedbush Securities.
All three major indexes have gained about 5% this month, and are up more than 6% for the quarter. Stocks are on track for double-digit gains for the year.
"Stocks have come a long way in recent months, and investors need a moment to catch their breaths," said Steven Goldman, market strategist at Weeden & Co. "We're pretty content with where stocks are for the year, though that's not to say we can't exceed the current levels."
Investors remain somewhat cautious as they wait for Congress to extend the Bush-era tax cuts, said Paul Radeke, vice president at KDV Wealth Management.
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