Worry Over Europe’s Sovereign Debt Yields Knocked U.S. Markets Lower

For the week of Monday, November 14, 2011 through Friday, November 18, 2011:

• Standard & Poor’s 500 Index: -3.81%
• Dow Jones Industrial Average: -2.94%
• NASDAQ Composite: -3.97%

On Monday, yields on Italian debt crept to more than 7%, the point at which their debt becomes unsustainable. In an effort to contain the situation, the European Central Bank began purchasing bonds and was able to knock the yield down below 7%. This triggered a sell-off in European markets that began affecting U.S. markets later in the week. Despite the European financial mess, earnings season is drawing to a close. The majority of companies have beaten expectations. Economic Data shows that inflation has finally leveled off, and consumer spending and manufacturing activity have picked up. The housing market showed positive signs in October as permit issuance for new construction picked up. Jobless claims also managed to stay below the 400,000 mark as seasonal holiday hiring begins. We believe the fourth quarter looks to be relatively strong; however, we will have to wait and see if Europe can get a hold on its sovereign debt situation.

Economic Data 

• Consumer Price Index (CPI)
  • October CPI fell 0.1% after several months of high inflation, the second decline this year.
  • Energy prices led the decline, falling 2%.
    • October CPI rose 0.1% excluding energy
    • For the second month straight, CPI rose 0.1% excluding both food and energy.
  • For the year, core CPI is holding around 2%.
  • Inflation is expected to remain relatively flat for the rest of the year, into early 2012.
    • This allows the Fed some flexibility if additional stimulus is deemed necessary.
• Industrial Production
  • Industrial Production numbers for October were better than expected, rising 0.7%.
    • Data for previous months were revised slightly lower.
  • Posting the largest increase since July, manufacturing output rose 0.5%, more than expected.
    • Automobile production led, rising 3.1%
  • Outside of the automotive sector, manufacturing output rose 0.3%.
  • We expect manufacturing to remain strong through year end with final sales rising and inventory accumulation slowing.
• Retail Sales
  • Retail sales picked up a bit in October, rising 0.5% as consumers spent more than expected.
  • October’s numbers mark the second largest increase since March, however they were lower than September’s 1.1% increase.
  • Electronics, appliances, building supplies and groceries led the way with sales growth of more than 1%.
  • Department stores, apparel, furniture and gasoline sales lagged.
  • Sales growth is still 7.2% lower, year-over-year.
• Housing Starts
  • The housing market continues to struggle with new home starts for October falling 0.3% from September.
  • However, this is better than expected, despite September housing starts being revised 4% lower.
  • On the bright side, permit issuance rose 11% month-over-month and 18% year-over-year.
• Jobless Claims
  • Initial claims fell to 388,000 from 392,000, which is positive news.
  • Claims from two weeks ago were revised higher to 393,000 from 390,000.
  • Initial jobless claims have reached their lowest level since April.
  • This is a good surprise since claims were expected to rise slightly.

Corporate Earnings:

• Lowe’s Companies Inc.  (NYSE: LOW)
  • Restructuring and store closing costs reduced Lowe’s net income 44%; however, adjusted results beat expectations.
  • Lowe’s posted earnings of $225 million, down from last year’s $404 million.
    Revenue rose 2% to $11.9 billion with an adjusted earning per share of $0.18.
  • The home improvement retailer does not expect the housing market to recover until 2013.
• The Home Depot, Inc. (NYSE: HD)
  • Home Depot beat expectations for the quarter growing earnings 12%.
    • Net sales increased 4.4% and same-store-sales grew 4.2%.
    • Earnings of $934 million beat last year’s $834 million.
    • Sales were $17.33 billion, up from last years $16.6 billion.
  • The home improvement retailer increased its dividend 16% to $0.29 per share.
  • The company also raised estimates for fiscal 2012 to $2.38 per share.
• Dell Inc. (NASDAQ: DELL)
  • Dell’s revenue remained flat; however, net income rose 9% as the company cut costs.
    Earnings for the quarter were $893 million over last year’s $822 million.
  • Taking a few one-time exclusions, earnings were $0.08 better than expectations.
  • Revenue was $15.4 billion, which was lower than the $16.2 billion expected.
  • The technology company adjusted guidance for the year toward the bottom of their previous range at $62.1 billion.
  • Analyst predictions were $62.6 billion.

Interest Rates

• The two-year Treasury inched up one basis point to 0.24%, holding between 0.15% and 0.30%.
• The five-year Treasury slipped three basis points to 0.88%, down a good bit from October’s 1.2% rate.
• The 10-year Treasury fell seven basis points and is currently slightly under 2%.
• The 30-year Treasury yield dropped nine basis points to 3.02%.

Disclosures:

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