The markets were up through the end of Thursday, Oct. 8, 2010, with the S&P 500 up 1.03% lead by a gain of 2.03% in the Industrials sector. The Dow was up 1.10% and the NASDAQ posted gains of 0.54%. On Friday, the Labor Department announced nonfarm payrolls fell by 95,000, and private-sector employers added only 64,000 jobs in September. The unemployment rate remained unchanged at 9.6% for September, despite predictions that it would rise.
In retail sales, same-store sales were better than expected, raising hopes for the holiday shopping season. Retailers targeted to teenagers were particularly strong, including American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch Co. (NYSE: ANF) and Limited Brands, Inc. (NYSE: LTD). The Commerce Department announced orders for U.S. manufactured goods fell 0.5% in August; however, if transportation goods are excluded, factory orders increased. Transportation equipment orders fell 10%. Excluding airplanes, non-defense capital goods orders rose 5.1% and durable goods fell 1.5%. Tuesday’s ISM Non-Manufacturing Index reversed its August decline and its September expansion was better than expected.
Interest rates continued their fall with the two-year U.S. Treasury reaching a new all-time low of 0.37%. Not to be outdone, the five-year Treasury also reached a new low of 1.15%. The 10-year Treasury fell to a two-year low of 2.4%, while the 30-year Treasury fell to 3.7%.
We still feel there are pretty strong signs that our economy will not slip into a double-dip recession. When we receive one piece of bad news, it is followed by two to three pieces of good news.
With earnings season starting, we saw Costco Wholesale Corporation’s (NASDAQ: COST) earnings per share come in at $0.97, beating analysts’ forecasts; however, the company posted lower-than-expected margins and slower same-store sales growth. Same-store sales rose 5% in September, but this is down from the 7% increase Costco saw in August. The company’s revenue also slightly missed analyst expectations. We see Costco’s same-store sales as a fairly good sign, because many of their stores are located in California, and with the economic growth in California low, that leads us to believe the rest of the country buoyed Costco’s profits.
Consumer Staples giant PepsiCo Inc. (NYSE: PEP) posted a 12% jump in third-quarter profit on solid international gains. PepsiCo’s acquisition of its two largest North American bottlers proved to be a strong move as this catapulted revenue about 40% to $15.5 billion. With all these positives, the company lowered its guidance to 10%-to-11% for fourth quarter because of expected currency exchange rates.
The markets also saw healthy mergers and acquisitions activity in several sectors. French pharmaceutical giant Sanofi-Aventis SA (NYSE: SNY) launched an $18.5 billion hostile takeover attempt of Genzyme Corporation (NASDAQ: GENZ). Sanofi-Aventis went directly to the shareholders after the biotech company’s board rejected multiple offers. Analysts expect the deal could be completed for $75-to-$80 per share. We think this is a good sign for consolidation in health care.
The Coca-Cola Company (NYSE: KO) finalized their deal this week with a $12.3 billion deal for Coca-Cola Enterprises’ (NYSE: CCE) North American business. As part of the merger, Coca-Cola Enterprises paid out a hefty dividend to shareholders, which sent the shares lower. Also in Consumer Staples, there is a rumor that private equity firm KKR & Co. L.P. (NYSE: KKR) might buyout Sara Lee Corp. (NYSE: SLE). To us, this would bring good consolidation in the sector.
For consumers, the big news was the Department of Justice filing suit against American Express Company (NYSE: AXP), Visa Inc. (NYSE: V) and MasterCard Inc. (NYSE: MA) on Monday. The Department of Justice alleges that the way these credit card companies deal with merchants violates antitrust laws. This stems from a two-year investigation into the payment-processing industry.
Visa and MasterCard settled immediately and agreed to let merchants offer discounts based on whether customers pay with cash or various cards. American Express challenged the suit because the settlements now favor Visa and MasterCard. American Express charges merchants a higher fee at 2.56% for the ability to offer payment using their networks. Visa and MasterCard both charge less than 2%. American Express does not want to discount their fee, as it funds their robust rewards program for cardholders. The company feels that merchants could use American Express to attract wealthy, big spenders into their stores, and then at checkout offer them discounts if they use Visa or MasterCard.
Lastly, the currency wars continued between the United States and China. This week Japan and a few other European nations discussed making their currency weaker, and they intervened by buying U.S. bonds. China is still not budging. Even U.S. Treasury Secretary, Timothy Geithner, bluntly said that China has deliberately undervalued the exchange rate aiming to helping China’s export industries.
When the economy goes soft and countries begin to have a hard time, protectionism jumps in, and, to no surprise, countries act in their own self interest by lowering the value of their currency.
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