Stock Market and Financial Market Updates: Daily Market Update: Charles Schwab

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Posted: 11/20/09 1:15 PM ET

Miss by Dell, Strength in Dollar Pressure Stocks

Stock weakness persists, with the biggest drags once again being commodity-related stocks as the dollar is bouncing back from recent lows. Technology shares are also under pressure after a disappointing earnings report from Dell. In other equity news, homebuilder D.R. Horton is sharply lower after it missed earnings expectations. Elsewhere, retailers Gap and Ann Taylor are both under pressure after reporting good earnings but warning that this holiday season they expect to see heavy discounting pressure. Meanwhile, J.M. Smucker and Intuit each beat analyst EPS forecasts, Alcoa said it will idle its Italian operations, and Proctor & Gamble issued upbeat commentary. In bond markets, Treasuries are lower in the absence of economic data. Overseas, Europe saw early gains dissipate after the ECB warned that monetary easing may be reduced.

At 12:54 p.m. ET, the Dow Jones Industrial Average is down 0.5%, the S&P 500 Index is off 0.7%, and the Nasdaq Composite is declining by 0.9%. Crude oil is down $0.76 to $76.70 per barrel, wholesale gasoline is unchanged at $1.97 per gallon, and the Bloomberg gold spot price is lower by $1.48 at $1,143.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.5% at 75.65.

Dell Inc. (DELL $14) reported 3Q EPS ex-items of $0.23, which fell short of the $0.28 that Wall Street analysts had expected. Revenues increased 1% versus last quarter to $12.9 billion, but represented a decline of 15% versus a year ago and also came up short of the Street’s forecast, which called for the computer maker to post revenue of $13.1 billion. DELL said shipments were flat sequentially and down 5% versus the same period a year ago, though its large enterprise and small and medium business segments posted sequential improvements in shipments, revenue and operating income. The company’s CEO Michael Dell said, “We are seeing improvement in overall underlying IT demand that is continuing into the fourth quarter.” Looking ahead, DELL said it expects 4Q revenue to improve over 3Q and recent technology introductions, indications of improving economic activity and the prospect of a lift in associated IT spending position the company well. Shares are sharply lower.

D.R. Horton (DHI $11) reported that its net loss for 4Q narrowed from $2.53 per share last year to $0.73 per share, but larger than the $0.30 loss that analysts had expected. The company’s results included charges for losses on land values and write-offs of costs from land it decided not to acquire. Homebuilding revenue totaled $1 billion, compared to the $1.1 billion that had been anticipated by analysts, but DHI’s sales backlog of homes under contract increased from 5,297 to 5,628, and sales orders increased 26% to 5,008 homes. The company’s cancelation rate—canceled sales orders divided by gross sales orders—was 27%. DHI’s Chairman said, although sales jumped, “market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for homebuyers and weak consumer confidence. “ Shares are sharply lower.

Gap Inc. (GPS $22) reported 3Q net earnings increased 25% to $0.44 per share, above the $0.37 per share that analysts had forecasted, with revenues increasing 1% versus last year to $3.6 billion, slightly higher than the $3.5 billion that the Street expected. Same-store sales at the company were flat compared to a 12% drop that it posted last year, led by a 10% increase in its lower-priced Old Navy North American stores. Gap announced that it successfully kept a tight lid on costs and as a result, recorded its highest operating margin in a decade at 13.9% – up from 11.1% in 3Q 2008. Looking ahead to the holiday season, the company noted that it will continue to be aggressive on price in order to attract shoppers looking for bargains. "We know the customer is really looking for value," CFO Sabrina Simmons told investors. "So we're going to play hard and you'll see us really competing over Black Friday for those dollars." CEO Glenn Murphy echoed similar sentiments. "Today the customer's psyche is, 'Give me a reason. Give me a reason to drive to the mall. Give me a reason to get out of my house,'" he said. "We have to find that reason." Separately, GPS announced a new $500 million share repurchase program. GPS is trading lower.

Fellow retailer Ann Taylor Stores (ANN $13) announced 3Q EPS of $0.20, well above the Street’s view of $0.07. Sales during the quarter fell 12% though to $462 million, missing analysts’ estimate of $474 million, as same-store sales plunged 13.7%. The company said the weak sales performance and strong margins was partially by design. "Our third-quarter strategy was focused on maximizing gross margin dollars, not comp performance, while mitigating inventory risk," the CFO said. As a result, the company’s gross margin was 8.5 percentage points higher than last year at 57.3%. Looking ahead, the company was cautious on its future prospects, saying 4Q sales and earnings are likely to be slightly below those achieved in 3Q as it expects a difficult market environment with “heightened promotional activity to drive traffic and sales volume throughout the holiday season.” Shares are under solid pressure.

J.M. Smucker (SJM $56) said it earned $1.22 per share in 2Q after excluding integration costs related to its acquisition of Folgers. That was well above the $1.04 that analysts had forecasted. Meanwhile, sales rose 52% to $1.28 billion, also above the $1.24 billion that had been expected. Excluding the impact of foreign exchange and Folgers, which was acquired last November from Proctor & Gamble (PG $62), sales were down 6%. Nevertheless, the company said it saw volume increases across most of its business, and it will continue to invest heavily in marketing to promote its products during the holiday baking season. For the full year, SJM increased its earnings guidance to a range of $3.95-$4.05 per share, up from a previous view of $3.65-$3.80. Analysts expect $3.83. Shares are solidly higher.

Intuit Inc. (INTU $30) reported a fiscal 1Q net loss ex-items of $0.10 per share, compared to the loss of $0.16 that analysts had expected, with revenues increasing 2% to $493 million, above the $488 million that the Street had expected. The maker of business and accounting software such as TurboTax and QuickBooks said its revenue growth was led by its employee management solutions’ payroll service and its financial institutions unit. However, shares are under pressure after it issued EPS guidance for 2Q that missed analysts’ expectations.

Dow member Procter & Gamble’s (PG $62) Chief Financial Officer noted he sees foreign exchange turning into a modest tailwind in the second-half of the fiscal year, and that he sees market growth of 1-2% in value, which is higher than his prior estimate. However, he did warn that uncertainty remains regarding market growth. The executive also said that acquisitions are not a core aspect of the company’s growth strategy and it does not pursue hostile acquisitions, in response to some “continuous speculation” about the company making acquisitions. PG’s CFO also said the company is targeting a “meaningful” level of share buybacks, but that level is likely to be below the $8 billion annual threshold set before the global market meltdown. Shares are lower.

Fellow Dow component Alcoa (AA $13) is under pressure after the aluminum producer announced that it will temporarily idle production at its two smelters in Italy. AA said the announcement is a result of uncertainty in obtaining future power supply for the smelters at competitive rates and the financial impact of today’s European Commission decision that Italy’s extension of its electricity tariff after 2005 did not comply with state aid rules and that a portion of the benefit received by AA must be refunded. AA said it is appealing the decision.

Treasuries are mixed as economic calendar is dormant

With no major economic reports on today’s economic calendar, Treasuries have turned lower in late-morning action, giving back some of Thursday’s gains that followed yesterday’s slide in the equity markets as traders appear to be uncertain about the health of the global economic recovery. Economic data this week has done little to soothe these concerns as we have seen a slightly hotter-than-expected reading of prices at the consumer level, a smaller-than-expected increase in industrial production, unexpected declines in both housing starts and building permits, and a jobless claims report that failed to drop below the 500,000 mark as some had hoped.

However, Schwab’s Chief Investment Strategist Liz Ann Sonders and Director of Sector and Market Analysis, Brad Sorensen, CFA, have noted in their bi-weekly Schwab Market Perspective: Stable and Sustainable?, that they believe the general market trend will continue to be higher, but gains are likely to be more muted, and bumps along the way are inevitable. Read more on their market perspective as well as other timely commentary from other Schwab experts at www.schwab.com/marketinsight.

Early advance thwarted by ECB comments

Stocks in Europe finished lower after erasing an early advance in afternoon action following comments from European Central Bank President Jean-Claude Trichet regarding reining in stimulus measures to stave off a flare up in inflation. The ECB chief said, “Not all our liquidity measures will be needed to the same extent as in the past,” and he added that “Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally.” Financials lead the decline along with weakness in oil and gas issues.

In equity news across the pond, Volkswagen’s (VLKAY $28) board approved final contracts of implementation, clearing the way for its takeover of Porsche (POAHY $8), saying these contracts “specify the binding provisions governing the organizational, structural and legal details of the union between the two companies.” In eurozone economic news, Germany reported that producer prices came in unchanged month-over-month in October, but the year-over-year decline of 7.6% for prices at the wholesale level came in slightly larger than the -7.5% that economists surveyed by Bloomberg had expected.

Schwab Center for Financial Research - Market Analysis Group

©2009 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for
his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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Schwab or its affiliates has managed or co-managed a public offering of securities for this company in the past 12 months.

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