Thursday saw U.S stocks close modestly higher in a day of choppy trading as encouraging corporate earnings overshadowed jitters over recent currency fluctuations.
The Dow Jones Industrial Average (DJIA) muscled its way to a triple-digit gain within the first hour of trading today, thanks to initially well-received earnings reports from McDonald's Corp. (MCD), Travelers (TRV) and Caterpillar Inc. (CAT).
However, the latter company's concerns about persistently high unemployment levels eventually overshadowed its consensus-beating quarterly figures and upwardly revised guidance, sending the shares of CAT into the red by midday.
Meanwhile, lingering concerns about Bank of America's (BAC) future, as well as a strengthening greenback and a revision to last week's jobless figures, also rained on the Street's early earnings-related parade.
Against this backdrop, the major market indexes spent time on both sides of breakeven, but eventually finished the session with relatively muted gains.
The Dow triple-digit rally faded and the Nasdaq Composite dipped into negative territory Thursday afternoon as the U.S. dollar reversed course and turned positive, offsetting enthusiasm for the latest batch of earnings beats from companies like Caterpillar.
Stocks rebounded in a late rally after Federal Reserve Bank of St. Louis president James Bullard suggested that the central bank could announce Treasury purchases in “small increments” at its November meeting.
But by the end of the session, the fundamental picture seemed to win out. The Dow rose, helped by McDonald's Corp (MCD) and Travelers Cos Inc (TRV), both of which hit 52-week highs after stronger-than-expected results.
The Dow Jones Industrial Average (DJIA) closed up 38.60 points, or 0.35%, at 11146.57, reversing an afternoon slump.
"Companies are continuing to show that they are continuing to make money in a low nominal GDP environment and that they are very good at it and they can continue to do so," said Paul Zemsky, head of asset allocation at ING.
Investors have been trading the dollar and equities against each other recently as expectations the Federal Reserve will pump billions into the economy have pressured the greenback while lifting stocks.
"The trade has been: Weak dollar is good for commodities and is good for any risk-related assets like equities. On dollar weakness, buy those things; on dollar strength, get out of those things," said Bill Strazzullo, partner and chief investment strategist at Bell Curve Trading in Boston.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 11.146.57) finished with a gain of 38.60 points, or 0.35%.
The S&P 500 Index (SPX – 1,180.26) had a gain also, on the day, of 2.09 points, or 0.18%.
The Nasdaq Composite (COMP – 2,459.67) ended the day with a small gain of 2.28 points, or 0.09%.
The Russell 2000 Index of smaller companies had a loss of 4.56 points, or 0.65%, to settle at 697.55.
Commodity-linked stocks have been among the most sensitive to the trade. Occidental Petroleum Corp (OXY) fell 2.7 percent to $78.80 while the S&P energy index .GSPE edged lower as oil dropped more than 2 percent to under $81 per barrel.
Barely half of the Dow's 30 components headed north in recent trading, led by Home Depot (HD), McDonald's andUnited Technologies (UTX). The index's worst performers were Bank of America (BAC) and Caterpillar.
Led by eBay (EBAY), the Nasdaq Composite also posted early gains before retreating. Tech stocks like Amazon.com (AMZN) and Electronic Arts (ERTS) were among the best performers.
Notes of Interest
• The Dow Jones Industrial Average’s (DJIA) ended a wishy-washy session with a gain of 38.6 points, or 0.4%, as 21 of its 30 components settled higher.
Despite more than halving its intraday lead, the Dow finished at its highest price since May 3.
• The S&P 500 Index (SPX)also ended a volatile session in the black, notching a gain of 2.1 points, or 0.2%.
• The Nasdaq Composite (COMP), the tech-rich index, muscled back into positive territory by the close, edging just 2.3 points, or 0.1%, higher.
• Crude futures ended the session lower today, as news of a slowdown in China's gross domestic product growth sparked concerns about demand. Furthermore, the greenback's rebound also weighed on black gold, making it more expensive for foreign-currency holders to scoop up the dollar-denominated commodity. By the close, December-dated crude oil futures gave back $1.98, or 2.4%, to end at $80.56 per barrel.
• Gold futures also suffered in the wake of the strengthening dollar, which jumped to $1.40 versus the euro. In addition, a bout of profit-taking on the heels of the malleable metal's string of record highs also sent gold reeling. Against this backdrop, gold for December delivery surrendered $18.60, or 1.4%, to finish at $1,325.60 an ounce – the contract's lowest close since Oct. 4.
• Bonds: The price on the benchmark 10-year U.S. Treasury fell, boosting the yield to 2.54%.
Initial Jobless Claims
New U.S. claims for unemployment benefits fell more than expected last week, government data showed on Thursday, pointing to some improvement in the labor market.
Initial claims for state unemployment benefits fell 23,000 to a seasonally adjusted 452,000, the Labor Department said.
Despite the drop, which also saw the unwinding of the prior week's administrative related-jump, claims remain perched above levels usually associated with a strong job market recovery; making it all but certain the Federal Reserve will ease monetary policy further next month.
Analysts polled by Reuters had forecast claims falling to 455,000 from the previously reported 462,000. The government revised the prior week's figure up to 475,000.
Last week's claims data covered the survey period for the government's October non-farm payrolls report. A Labor Department official said only the Virgin Islands' claims had been estimated in the most recent week and noted the prior week's claims number had been pushed up by administrative factors.
The Federal Reserve is widely expected to announce a second round of asset purchases, also known as quantitative easing, at its Nov. 2-3 meeting to keep interest rates low in an effort to combat high unemployment and boost demand.
The labor market has stumbled as the economy's recovery from the most painful recession 70 years fizzled, leaving the jobless rate at an uncomfortably high 9.6 percent.
Last week, the four-week average of new jobless claims, considered a better measure of underlying labor market trends, fell 4,250 to 458,000.
Claims for jobless benefits have moved sideways for much of this year and continue to hold below a nine-month high touched in mid-August.
The number of people still receiving benefits after an initial week of aid dropped 9,000 to 4.44 million in the week ended Oct. 9, the lowest level since the week ending June 26, from an upwardly revised 4.45 million the prior week.
Analysts polled by Reuters had forecast so-called continuing claims edging up to 4.41 million from a previously reported 4.40 million.
The number of people on emergency benefits increased 152,112 to 4.04 million in the week ended Oct. 2.
U.S. economic growth is “slow” and doesn’t have momentum, the Conference Board said Thursday as it reported that its leading economic index rose 0.3% in September.
The leading economic index — a weighted gauge of ten separate indicators — rose as economists polled by MarketWatch had anticipated. The six-month change has slowed to 0.8% from 5.1%.
The index for August was revised lower to 0.1%, from the 0.3% rise initially reported, and the July index was revised higher to 0.2%, from the 0.1% rise initially reported.
David Wessel discusses his conversation this week with Treasury Secretary Tim Geithner and why the U.S. seems to be supporting a weaker dollar while officially pushing for a stronger U.S. currency.
“More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011,” said Ken Goldstein, economist at the Conference Board.
In September, initial unemployment and financial components helped put the index in positive territory, offsetting the weakness from supplier deliveries and building permits.
There was growth from five of the ten indicators — interest rate spread, average initial jobless claims, real money supply, stock prices and manufacturers’ new orders for consumer goods and materials. The index of supplier deliveries, building permits and the index of consumer expectations were a negative weight.
Average weekly manufacturing hours and manufacturers’ new orders for nondefense capital goods held steady.
Outside economists largely shared the Conference Board’s assessment.
“The message is an even more sober one considering that in the 17 months since the index began to rise in April 2009, just over one-half of the cumulative increase has been due to the yield curve component,” said Joshua Shapiro, chief U.S. economist at MFR Inc.
Separately, the Labor Department reported a drop in weekly jobless claims, and the Philadelphia Fed’s manufacturing index returned to positive territory for the first time in three months.
Philly Fed Business Outlook
The index of manufacturing activity in the Philadelphia region returned to positive territory for the first time in three months in October but remained at low levels, according to a report released Thursday.
The Federal Reserve Bank of Philadelphia reported its diffusion index of current economic activity rose to positive 1.0 in October from negative 0.7 in September.
David Wessel discusses his conversation this week with Treasury Secretary Tim Geithner and why the U.S. seems to be supporting a weaker dollar while officially pushing for a stronger U.S. currency. Plus, a big day for earnings and China cools off.
The increase was not as strong as expected. Economists polled by MarketWatch were expecting the index to rise to 1.4.
The index is still well below levels earlier this year, consistent with a slowdown in manufacturing in recent months after a surge as the recession ended.The index was 21.4 as recently as May.
“We think the survey tells us that the drop in activity which followed the spring stock market rollover is over, but a proper rebound has not yet begun,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients.
Other regions haven’t been as weak, according to the Empire State index released last week and the Beige Book released Wednesday.
“Of the major ISM-related surveys, the Philly index has tended to be one of the weakest relative performers in recent months,” said Yelena Shulyatyeva, an economist at BNP Paribas.
Expectations for the Philadelphia index rose last week after the Empire State index jumped by 11.6 points in October to 15.7.
The Philadelphia Fed index and the New York Fed’s Empire State index are often used by economists to get an early sense of what the broader nationwide survey of manufacturing, the Institute for Supply Management’s purchasing managers index will report when it is released on the first business day of the month.
The ISM survey is seen as giving on the best snapshots of the economy, even though it just focuses on how the manufacturing sector is doing nationwide.
The Institute for Supply Management’s purchasing managers index has moderated to 54.4 in September after hitting 60.4 in April. After the Philadelphia survey, economists said they expect the overall ISM index to decline a bit in October. The data will be released on Monday, Nov. 1.
In October, indexes for new orders and shipments continued to indicate weakness, the Philadelphia Fed said.
The new orders index remained negative for the fourth consecutive month. Firms continue to report decline in inventories and unfilled orders. The index for employment was slightly positive.
About 20% of firms surveyed reported increases in employment, just above the 17% that reported decreases.
More firms reported declines in average work hours for existing employees than reported increases.
The future general activity index increased 15 points to a reading of 41, its highest reading in six months.
In a separate report, the Labor Department reported that initial jobless claims fell to 452,000 in the latest week from 475,000 in the prior period.
The Conference Board also reported that the index of leading economic indicators advanced 0.3% in September.
Currencies: The dollar climbed against the euro, the Japanese yen, and the British pound.
European Markets posted strong gains. The DAX in Germany and the CAC 40 in France both surged 1.3%, while Britain's FTSE 100 jumped 0.5%.
Asian Market finished mixed. Japan's benchmark Nikkei was a few points lower, while the Hang Seng in Hong Kong rose 0.4%. Shares in Shanghai eased 0.7%.
Company Earnings Reports
Amazon.com Inc. (AMZN)
Amazon.com Inc. reported a 16% gain in third-quarter earnings on Thursday as sales for the period beat Wall Street’s targets.
However, the online-retail giant saw its shares clipped by 3% after hours, with its margin forecast for the fourth quarter missing analysts’ forecasts.
The stock has been on a strong run of late, surging more than 35% since the last quarterly report and closing up almost 4% at $164.97 in the regular session Thursday. For the period ended Sept. 30, Amazon (AMZN) reported net income of $231 million, or 51 cents a share, compared with net income of $199 million or 45 cents a share for the same period last year.
Revenue jumped 39% to $7.56 billion.
Analysts were expecting earnings of 48 cents a share on revenue of $7.37 billion, according to consensus forecasts from FactSet Research.
Operating income came in at $268 million; analysts had been expecting $289.5 million. This brought operating margins to 3.5% for the period — within the range of 3% to 4% that Amazon had estimated in July.
For the December quarter, Amazon said it expects revenue to come in the range of $12 billion to $13.3 billion. Analysts were looking for about $12.3 billion in revenues, according to FactSet estimates.
Operating margin for the period is expected to come in the range of 3% to 4.2%. Wall Street had been expecting 5%, on average, for the quarter.
American Express Co (AXP)
American Express Co (AXP) reported a 71 percent rise in third-quarter profit on Thursday, as credit quality improved and its wealthy customers resumed spending.
The credit card company and processing network earned $1.1 billion, or 90 cents per share, in the third quarter, compared to a year-earlier profit of $640 million, or 53 cents per share. The year-earlier income included a $180 million accounting benefit for an investment in foreign subsidiaries.
The company is shifting its focus from lending to processing transactions, which carries less credit risk and offers more growth opportunity while loan demand remains weak. But U.S. regulators are increasingly scrutinizing the card processing industry.
American Express shares closed up 1.4 percent at $40.27 on Thursday, and rose slightly in after-market trading.
Baidu Inc's (BIDU)
Baidu Inc's (BIDU) results and revenue forecasts beat expectations after China's biggest search company increased its Web traffic and customers at the expense of rival Google Inc (GOOG).
Google has pulled back in China, the world's largest Internet market with 420 million Web surfers, after it tangled with Beijing this year over censorship and hacking claims.
Baidu, whose name is taken from an ancient Song dynasty poem, now commands more than 70 percent of China's search market and is aggressively seeking other revenue streams by diversifying into e-commerce and online video.
Baidu executives said the firm will upgrade its network servers in the coming quarters and increase its sales and research and development teams to bolster future growth.
"Overall, it is positive news that they beat the current quarter slightly, and for the next quarter they gave good guidance and the margin scalability continues to be very strong," said Eric Wen, an analyst with Mirae Asset.
Baidu shares rose 0.5 percent to $104.09 in after-hours trading following the results, building on a 2.5 percent gain during Thursday's regular session. The share price has more than doubled since Google's troubles in China began in January.
Baidu expects fourth quarter revenue of between $354.2 million and $364.7 million, ahead of the average analyst forecast of $348.5 million.
Third-quarter net income more than doubled to $156.4 million, or 45 cents a share, from $72.2 million, or $2.07 per share, a year ago before a 10-for-1 stock split. Analysts were expecting earnings of 41 cents per share.
Revenue surged to $337.2 million from $187.3 million a year ago. Analysts, on average, had expected revenue of $333.3 million, according to Thomson Reuters.
Analysts credited the stabilization of Baidu's advertising keyword system for the uptick in paid click volume and increased customers in the third quarter.
In the third quarter, China's search market grew 59 percent to 3.13 billion yuan ($471 million). Baidu had 72.9 percent of the market, while Google had 24.6 percent, according to technology research firm iResearch.
While Baidu's surge in search continues, it faces increased competition from local players. This month, Taobao, a unit of Alibaba Group, China's largest e-commerce company, launched search engine Etao.
Analysts said Baidu, which formed an e-commerce joint venture with Japan's Rakuten (4755.Q) to compete against Alibaba, may start generating income by the fourth quarter.
"This certainly diversifies its revenue, and starting from Q4 they will start having this revenue," said Fiona Zhou, an analyst with Pacific Epoch. "They have always wanted to leverage their shared search traffic to help the e-commerce revenue, but they have never successfully done that. I think the JV with Rakuten will be a success."
China's e-commerce market was worth 119.1 billion yuan ($17.9 billion) in transaction value in the second quarter. Robin Li, Baidu's chief executive, said the number of online retailers advertising with Baidu had doubled in the third-quarter from a year ago.
The expansion of Baidu and Alibaba into each other's turf could lead to cannabilisation of the market and intense competition, but Li was unfazed.
"The majority of the users are lazy. They usually want to rely on one search box to satisfy their information needs," Li said on an earnings call.
"I don't see significant build up in organic traffic from those vertical search services, going forward I still believe the super majority of users will first come to Baidu," Li said. ($1=6.650 Yuan).
Company News and Movements:
Neflix, Inc. (NFLX)
Neflix, Inc. (NFLX) rallied to yet another all-time high today, with the shares boosted by a particularly strong earnings report. Today's record high is simply business as usual for this technical outperformer, which has been hitting a series of new highs for the past few weeks. At last check, NFLX had jumped 12.7% to trade around $172.55.
Unsurprisingly, option volume has exploded to triple the norm on NFLX today, with roughly 210,000 contracts changing hands. Option players have shown a slight preference for puts, with some 108,000 of these typically bearish bets crossing the tape.
However, today's heavy put volume hasn't necessarily been bearish. Over 9,800 contracts have traded on the November 150 put -- the majority of which changed hands at the bid price, indicating they were likely sold. With today's volume exceeding open interest at this strike, it seems that new contracts were added here today. By selling to open the November 150 put, option speculators are betting that NFLX will remain above the $150 level over the next four weeks.
Today's put writers may be counting on continued support from NFLX's 10-week moving average. This intermediate-term trendline is currently located just below the $150 level, and has supported NFLX since July.
Cirrus Logic, Inc. (CRUS)
Cirrus Logic, Inc. (CRUS) took the earnings stage bright and early this morning, with the integrated circuit concern confessing to a weaker-than-anticipated fiscal second quarter. What's more, the firm forecast third-quarter earnings below analysts' expectations, citing ebbing demand in its traditional non-portable audio products business. As you may have guessed, the shares of CRUS have suffered as a result, falling to a four-month nadir right out of the gate.
In the options pits, it appears the bears – who are in the minority among short-term traders, as evidenced by the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.26 – may be cashing in on their winning positions. So far today, the stock's newly in-the-money November 16 put has seen roughly 3,600 contracts change hands – 70% of which have traded at the bid price, suggesting they were sold.
Meanwhile, a slew of pessimists are betting on even more downward momentum for CRUS in the short term. In early afternoon trading, the equity's near-the-money November 14 put has seen about 2,200 contracts cross the tape on open interest of fewer than 1,500 contracts, pointing to the initiation of new positions. Plus, the majority of the puts have traded closer to the ask price, indicating they were likely bought. By purchasing to open the November 14 puts, the buyers are rolling the dice that CRUS will extend its retreat south of $14 in the near term.
At last check, the shares of CRUS have tumbled 15.3% to linger in the $13.82 neighborhood.
The following companies also have some impressive options movements:
Potash Corp. of Saskatchewan (POT)
Call volume climbed on POT yesterday, rising to 1.46 times the usual level. A total of 49,000 calls changed hands on the fertilizer firm, compared to just 35,000 puts.
On the International Securities Exchange (ISE) alone, speculators on Wednesday bought to open 7,814 calls on POT, along with 799 puts. The stock's single-day ISE call/put volume ratio arrived at 9.78, as nearly 10 times more calls than puts were purchased.
The day's trend toward bullish bets continued a recent pattern in POT's options pits. The security's 10-day ISE call/put volume ratio stands at 2.67, in the 97th annual percentile -- just three percentage points from a fresh optimistic peak.
The equity's Schaeffer's put/call open interest ratio (SOIR) also points to a generally upbeat attitude. POT's current SOIR of 0.73 ranks in the 36th percentile of its annual range, revealing that short-term options traders have been more optimistically aligned only 36% of the time during the past year.
Traders on Wednesday set their sights on POT's November 155 call, which saw the largest increase to open interest overnight. This out-of-the-money call gained 9,635 new contracts as a result of Wednesday's activity, and is now home to a total of 18,317 contracts.
Elsewhere on Wall Street, short sellers have been unraveling their bearish bets against POT. Short interest on the Canadian commodity concern deflated by 33.5% during the most recent reporting period, and now accounts for just 2.2% of POT's float.
Options players were likely placing their bets ahead of the Canadian government's planned decision regarding BHP Billiton's $38.6 billion hostile takeover bid for POT. The latest speculation suggests that the government is likely to grant its conditional approval to the merger.
POT has been in a holding pattern on the charts lately, as the buyout drama with BHP continues to drag on. The stock drifted south of support at its 50-day moving average on Wednesday, and this trendline now seems to be exerting some mild resistance on the shares.
Dendreon Corporation (DNDN)
Calls were the options of choice on DNDN yesterday, with optimistically oriented option volume ramping up to 1.90 times the norm. About 16,000 calls changed hands during the course of the session, compared to the equity's average daily call activity of approximately 8,600 contracts.
In fact, calls have been steadily gaining popularity on DNDN in recent weeks, as evidenced by the equity's 10-day ISE call/put volume ratio of 2.47. This reading ranks higher than 73% of comparable ratios taken during the past year, revealing that traders have scooped up calls over puts at a faster-than-usual pace in recent weeks.
Taking a closer look at Wednesday's volume, it looks like one speculator placed a moderately bullish bet by simultaneously buying DNDN's November 37 calls, and selling an equivalent number of November 42 calls. This long call spread will attain its maximum profitability if DNDN settles at or above $42 upon November expiration.
With DNDN slated to report earnings in early November, it's possible that traders are loading up on calls in order to hedge their bearish bets on the biotech. Short interest accounts for a healthy 8.3% of the equity's float, so there's no shortage of skeptics who might be looking to limit their upside risk.
On the charts, DNDN has pulled back significantly from its April peak near $58. The stock is now clinging to support at its 10-month moving average, which has contained all but two of DNDN's monthly closes since April 2009. If this trendline should give way, backup support from the equity's 20-month moving average is located as far south as $30.
Stocks have been on a roller coaster this week -- starting with gains on Monday, diving to 2-month lows on Tuesday, and ending sharply higher Wednesday. Investors have been taking in mixed earnings results, and waiting for more clues about the next round of asset purchases from the Federal Reserve.
There has been growing speculation over the past month that the Fed will launch more quantitative easing. The move -- known as QE2 -- would mark the second round of large-scale asset purchases of U.S. Treasuries by the Fed, as part of its effort to get the economy moving.
But comments from U.S. Treasury Secretary Timothy Geithner on Thursday suggested that the Fed's action won't be as large as expected, sending the dollar higher and taking steam out of the stock market's early rally.
"Geithner hinting that the dollar isn't as weak as we thought is making people start to think quantitative easing is going to be smaller than expected," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. "Markets have been banking on a huge printing of money, so if it's smaller, that's good for the dollar but bad for stocks."
Stocks had weakened in the afternoon as the dollar strengthened and traders said jitters over the threat of a currency war were spooking the market.
“The market is trading a lot counter to what the dollar’s doing,” said Craig Hodges, president of Hodges Capital Management. But investors looking ahead to expected stimulus support from the central bank are unlikely to let stocks slide too far, he said.
“Quantitative easing is a nice backdrop and I also think the potential for some more pro-business news in the election coming up” is helping to stabilize the market, Hodges said.
A rush of corporate earnings buoyed hopes for improving business conditions, though some questioned whether the market had already priced in the better-than-expected reports.
“Clearly earnings have been coming in relatively well compared to the consensus, but the market’s also moved up pretty substantially and you get into some of these questions about whether these numbers were priced in,” said Jeff Morris, head of U.S. equities at Standard Life Investments.
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