A Second Day of Losses

[Excerpted from Bill Cara's Daily Report]

The US equity market gave back some more of Monday’s gains with a second day of small losses. At the close in New York, the S&P 500 (1,057.08 -3.53 -0.33%), DJIA (9,712.28 -29.92 -0.31%), and NASDAQ Composite (2,122.42 -1.62 -0.08%) were down.

The Toronto Exchange Composite (11,394.96 -0.03 -0.00%) was unchanged, but the Venture market (1,277.21 +4.90 +0.39%) followed up with another gain.

None of these markets seemed enamored by the rocket moves, down in the US Dollar ($USD 76.72 -0.40 -0.52%), or the prices of Crude Oil ($WTIC 70.30 +3.59 +5.38%) and Gold ($GOLD 1,007.70 +15.40 +1.55%) that soared right at 10:00am through to 12:30pm ET.

Pundits attributed the broad pull-back to the dismal Chicago Purchasing Managers Index report, but that data was issued at 9:45am ET:

Purchasers in the Chicago area report a surprising dip in business activity in September, news that raises questions whether tomorrow's ISM manufacturing report will dip back below 50. The Chicago business barometer fell nearly 4 points to 46.1 showing a more than 6 point fall in new orders to 46.3 and a nearly 6 point fall in production to 47.2. Deliveries moved more quickly confirming the weakness while backlogs contracted more steeply. The best news in the report is that job losses are severe but no worse while the pace of inventory destocking slowed.

At 10:30am ET, the EIA Weekly Petroleum Status data was issued, and that too had minimal impact on commodities and precious metals:

Stocks of crude oil rose 2.8 million barrels in the Sept. 25 week to 338.4 million, a build offset by a 1.6 million draw at the WTI delivery point of Cushing, Oklahoma and a 1.6 million draw in gasoline stocks. Refineries are limiting output, operating at a mild 84.6 percent of capacity. Low output and improving demand are behind the draw in gasoline. Gasoline demand is up a solid 5.4 percent year-on-year, reflecting price declines at the pump and also, perhaps, a fundamental improvement in consumer demand. Demand for jet fuel is also improving, down only 2.9 percent year-on-year compared with double-digit declines in prior weeks. Nevertheless, distillates remain a central weakness with stocks continuing to build, up 0.3 million barrels in the week with total stocks far above normal. It will take a cold winter, and heavy demand for heating oil, to drive down distillate stocks. Oil and gasoline prices are firming slightly in reaction to today's data.

Technology and Consumer Staples (XLK +0.3%, XLP +0.2%) were the only two sectors that lifted on the day, while the Industrial sector (XLI -1.0%) was the only notable loser.

For the industry groups in NY on Wednesday, as commodity prices flew, the commodity price sensitive Pulp & Papers ($DJUSPP -2.5%) actually dropped, reversing the prior day’s gain, while Goldminers ($XAU +1.3%) were modestly stronger, and the Oilers were unremarkable.

Leading the Cara 100 company stocks to the upside was Nike (NKE +7.7% +275%ADSV) and India’s ICICI Bank (IBN +6.1%). Nike issued a quarterly report that seemed hardly worthy of the opening gap:

Sep 30, 2009 (COMTEX) -- Sports clothing, equipment and accessories supplier NIKE Inc on Tuesday reported net income of USD513.0m or USD1.04 diluted earnings per share for its fiscal 2010 first quarter ended 31 August 2009… This is a slight increase from USD510.5m or USD1.03 diluted earnings per share last year… Revenues for the first quarter totaled USD4.8bn, down 12% from revenues of USD5.4bn a year ago… Nike stated that, excluding changes in currency exchange rates, net revenue was down 7% compared to the same period last year.

Interestingly, the report of an aspiring (CFA III candidate) equity analyst from Forbes/Investopedia, Kristin Graham, calling Nike “The Lean, Mean, Profit Machine” was issued yesterday:

This week's earnings report from Nike (NYSE: NKE) confirmed one thing: consumer confidence is still very weak. As a major blue-chip global consumer stock, Nike's performance provides a great indication of overall spending trends worldwide. With company-wide revenue falling 12% to $4.8 billion in the first quarter, shoppers are clearly still out of shape.

Fortunately, the sobering news stops there. Despite persistent unfavorable macro spending trends, Nike itself is financially fit. The company has been reorganizing its structure and maintaining tightly controlled inventory throughout the recession, allowing it to trample estimates quarter after quarter.

Through workforce reduction and operational streamlining initiatives, it shed 17% of its SG&A expense line. This resulted in flat earnings, despite the fact that it lost 100 basis points of gross margin and reported weak sales.

Since last year's first quarter, the balance sheet has grown stronger and now boasts $3.6 billion in cash - 40% more than in 2008. Inventory was reduced by 7% and long-term debt remains negligible.

Share repurchases continued throughout the quarter as management bought $15 million as part of its four-year plan to repurchase a total of $3 billion worth of shares. Thus, diluted earnings per share actually inched up 1%.

Scouting Out the Opponents: Aside from Adidas, Nike holds far more muscle power than its athletic apparel rivals. Columbia Sportswear(Nasdaq:COLM) was a hit years ago, but its brand is quickly fading. Crocs (Nasdaq:CROX) was a one-hit wonder and now remains an operational nightmare. And while Under Armour (NYSE:UA) and Lululemon (Nasdaq:LULU) may sport great domestic growth prospects, they are small niche plays that do not have the ability to continuously drive operational efficiency and withstand prolonged cutbacks in consumer spending.

Pulling Ahead of the Competition: Throughout the last decade, Nike has halved its waste output and recycles two-thirds of its scrap. The company has also pledged to reduce waste from its supply chain by 17%. In the long run, all of these costs savings will not only continue to fall to the bottom line, but will allow Nike to continue to invest in more promising growth markets.

With a globally recognizable brand, Nike clearly has an advantage over smaller up-and-coming rivals in the emerging markets arena. The company still generates 37.5% of its sales from the U.S. and thus it still has substantial room to further penetrate higher growth markets. It's no wonder, then, that analysts peg the company to grow 12% annually for the next five years; an impressive figure for such a behemoth.

Seems that somebody bought and paid for this timely piece of work.

The two Cara 100 company stocks that pulled back the most were Russia’s Mobile TeleSystems (MBT -1.9%, following Tuesday’s +5.5% gain) and China Telecom (CHA -1.9%). The latter dropped at the open along with China Mobile (CHL -0.9%) and China Unicom (CHU -1.0%). On Tuesday, Citigroup reiterated a Sell rating on CHU.

Interestingly, a top banking regulator in China that day claimed that Citigroup acted prudently during the post-Lehman crisis and should be encouraged to expand in China.

As the US Dollar dropped a bit ($USD 76.72 -0.40 -0.52%), the main winner was the Canadian Loonie ($CDW 93.50 +1.31 +1.42%). That move may be attributable possibly to the General Motors decision to terminate its Saturn manufacturing, with plants in Nashville TN and Wilmington DE, potentially creating more demand for Canadian produced vehicles.

The Euro ($XEU 146.31 +0.43 +0.29%), UK Pound ($XBP 159.97 +0.39 +0.24%) and the Yen ($XJY 111.37 +0.32 +0.29%) had modest gains.

After gains five sessions in a row and six in seven, the US Treasury Bonds ($USB 121.38 -0.25 -0.21%) dipped modestly. Treasury yields on the 30-year (4.048 +0.25 +0.62%) and 10-year (3.307 +0.15 +0.46%) recovered a bit after the previous session’s serious decline, while the yield on the 5-year paper (2.318 -0.24 -1.02%) dropped. T-bill yields moved a tad lower (0.115 -0.05 -4.17%).

On Tuesday, the International Monetary Fund (IMF) reported that international banks are in much better shape than previously thought.

Thursday the IMF opined in its semi-annual report on global financial stability that the world economy has “turned the corner”, adding that "financial markets have rebounded, emerging market risks have eased, banks have raised capital and wholesale funding markets have reopened," since the previous report.

Earlier Thursday in overseas equity markets, the focus was more on the rising Yen and falling US Dollar as equity prices were mostly down.

In Asia-Pacific markets, the Nikkei 225 of Japan (9,978.6 -1.53%) and Australia (4,702.0 -0.79%) were weak.

At 6:39AM ET, France (3,772.5 -0.60%), Germany (5,654.9 -0.36%) and the FTSE 100 of London (5,109.9 -0.47%) are down and getting weaker through the morning session.

In futures trading at 6:42am ET, the Euro (1.4568 -0.0077 -0.53%), the DJIA December futures (9619 -34 -0.35%), and the Crude Oil futures (70.01 -0.60 -0.85%) were all weaker, reflecting a stronger US Dollar.

At 6:55am ET, the precious metals market was quiet. Spot (cash) trades were as follows: for gold (1004.52 -1.48 -0.15%), silver (16.59 -0.04 -0.24%), palladium (292 0 0.00%), and platinum (1290 +1 +0.08%).