Not much sarcasm or spin to put on this one; in an increasingly bifurcated U.S. society we are seeing a lot of fraying of the seams. We've been pounding the table on the "real economy" for 2+ years, as the number of Americans on food stamps surges from 1 in 11, to 1 in 9... and now even Costco (COST) is rolling out food stamp programs [Oct 30, 2009: Costco to Roll Out Food Stamps Nationwide] but the country is obsessed with very different measures in calculating our domestic "prosperity".

This line by a Wal-Mart executive will take it's place as a candidate for quote of the year [Sep 1, 2009: China Sovereign Wealth Chairman with Quote of the Year 2009]

CEO Sean Boyd, Agnico Eagle Mines (AEM)

A couple of items from the "real economy" - we have not had much time to focus on that lately as we lather ourselves in the Kool Aid of federal government/central bank fiat money and all the good it does for us chosen folk in the speculator class.

First, Thursday we spoke about the nonsense that is government reporting; it appears the "You can't handle the truth" mantra has taken over the past 20 years in data presentations. Long time readers will know of countless stories we wrote on the subject of these mirage economic reports throughout 2007, 2008 and occasionally in 2009. At some point it becomes self-defeating so we just sort of smirk most of the time now, instead of wasting any breath explaining why this or that data point had been fudged. [Oct 2, 2009: True September Unemployment in America Reaches 14%]

The Conference Boards Index of Consumer Confidence dropped to 47.7 from 53.4 in September. While this is much higher than the readings in the low 20’s earlier this year, it is a very disappointing reading. Both the current situations index, and the expectations for conditions over the next six months dropped.

The present situation index fell to 20.7 from 23.0 and now stands at its lowest point since February of 1983, when it hit 17.5. The expectations component had seen a much larger recovery earlier this year, but it dropped from 73.7 last month to 65.7 in October. The number of people who see business as bad increased to 47.1% from 46.3% in September, while the percentage who saw business as good fell to 7.7% from 8.6% in September (where are those 7.7% of people located I wonder -- North Dakota?).

Disclosure: Author still long JNJ.

Costco Wholesale Corp. (COST) – Shares of the merchandise warehouse operator rose nearly 1.5% during the trading session to $58.77. A chunk of calls purchased in the front-month today indicates some investors expect continued upward movement in shares by expiration this Friday. Approximately 8,000 calls were purchased at the October 60 strike for 15 cents apiece. Shares of COST must increase at least 2% to $60.15 for investors to amass profits.

Sentiment

The major averages traded in a narrow range and are modestly higher late Friday. With no earnings of broad market significance and a light economic calendar, there wasn't much news to guide the early action.

The latest trade balance numbers, released pre-market, showed the deficit unexpectedly narrowing last month. It shrank to $30.7 billion in August from $31.9 billion the month before. Economists were expecting the deficit to widen to $33 billion. The first decline in May came as exports hit their highest level for the year and imports eased.

Retail stores have been among the hardest hit by the recent global recession, but it appears that finally some relief may be in sight. For the first time in 13 months retail sales rose, finishing up 1.1% in September. More big-ticket sales, a later Labor Day, and poor 2008 September numbers all contributed to the better-than-expected results.

Among the best performers were discounters such as Walgreen’s (WAG), which saw higher non-pharmacy sales, and Family Dollar (FDO), which saw its sales rise more than 5%. BJ’s Wholesale Club (BJ) and Costco (COST) also saw robust sales growth, suggesting that consumers are continuing to look for value. However, many teen and children’s retailers posted significant declines, a troublesome development since September performance usually gets a boost from the back to school rush.

While I don't want to be too bullish, this type of situation is precisely where bull markets are born. Plenty of skeptics and liquidity in the sidelines, and the pressure on bears to give in pushes an overbought market into further overbought levels. Corrections are minor as those who are left behind decide to buy on the dips, until eventually the recovery comes out true as advertised. Still, being traders and not buy and hold investors, we have to be aware that these are just swings and corrections are on the horizon. Enjoy the swing and make the most out of it.

Year-old trends continue:

• Same Store Sales (SSS) remain generally weak, more so at high end retailers (left end side on the chart) while discounters (right end side) outperform.
• September SSS were less bad for all retailers with negative sales trends and better for others. Obviously, as year-ago comps began to worsen at mid-year and got increasingly bad throughout the second half, comparisons have to improve. SSS turned quite weak for most retailers in September 2008.The fact that results beat analysts estimates only prove that analysts are not great in predicting monthly sales patterns (who is?).
• For example, GAP (GPS) and JC Penney (JCP) are showing much improved trends in September but their SSS were down 11.0% and 12.4% respectively in September 2008.
• At the opposite, BJ's (BJ)’ 5.5% sales gain this year is excellent given that it is against a 10.4% jump in September 2008.
• Also noteworthy: Aeropostale (ARO) keeps it up. TJX maintains a strong sales momentum.

Plaid is in vogue this fall season. Military themed wares have also caught on, even showing up to a degree in Banana Republic (go figure!). Although there is a sense of fashion in the malls and in discounters (by extension of course), the September same-store sales results are not displaying an aura of differentiation. Retailers largely surpassed consensus comp estimates, and a select few managed to upwardly revised 3Q EPS guidance. For the likes of Aeropostale (ARO), Gymboree (GYMB), and Target (TGT) the merchandise is striking the proper chord with consumers (right price/must have) and operating expenses have been removed from the operating model.

All told, our retail sector coverage, comprised of specialty and discount, produced a -2.9% average comp for the combined August/September periods, which we feel is a truer indicator given the shift in the retail calendar for Labor Day. The number stacks up against a -0.7% comp in 2008 for the same periods; stripping out Wal-Mart (WMT) from last year as the company no longer repots monthly sales and comps did in fact improve y/y, slightly. Part of the trend reversal could be attributed, in our view, to fewer deep promotions (sales=volume + price; the latter is helping at the moment). Retailers have gotten very creative in their promotions, offering for example buy one get one 50.0% off which brings consumers into the stores while preserving margin dollars.

Costco (COST), Apple (AAPL), AT&T (T), ConcoPhillips (COP)

F4Q09 Earnings Call

October 7, 2009 11:00 am ET

4:17 PM, Oct 7, 2009 --

• NYSE up 12.97 (0.2%) to 6,912.65.
• DJIA down 5.7 (0.1%) to 9,726.
• S&P 500 up 2.9 (0.3%) to 1,058.
• Nasdaq up 6.8 (0.3%) to 2,110.

GLOBAL SENTIMENT

Sentiment

Stocks are flat in a day of quiet trading Wednesday. The early earnings news was mixed. While Costco (COST) helped the retail sector with better-than-expected numbers, Yum Brands (YUM) and Monsanto (MON) suffered some post-earnings weakness. Investors now wait for Alcoa (AA) to unofficially kick off the earnings reporting season after the closing bell.

Meanwhile, the economic calendar remains light until weekly jobless claims and wholesale inventories Thursday morning. The next batch of meaningful data doesn't hit until retail sales next Wednesday. (However, same store sales from a number of retailers should grab some attention tomorrow morning.)

Costco Wholesale Corporation (COST), the fifth largest general retailer in the U.S., has reported better-than-expected fourth quarter fiscal 2009 results with net income of $374 million or 85 cents per share, compared to $398 million or 90 cents in the year-earlier quarter. The quarterly earnings well surpassed the Zacks Consensus Estimate of 77 cents per share.

For fiscal year 2009, net income was $1.09 billion or $2.47 per share compared to $1.28 billion or $2.89 per share in the previous fiscal year. The year-over-year decrease in the fiscal results was primarily due to the continuing softness in the U.S. economy, higher employee benefit costs and negative impact of foreign currency translation.

• Fed frets CRE collapse. In a just-revealed presentation to banking regulators last month, the Fed lamented that U.S. banks "are slow" to book losses on commercial real-estate loans being battered by slumping property values and rental payments (see below for more on commercial rentals). "Banks will be slow to recognize the severity of the loss - just as they were in residential," the Fed warned, suggesting banking regulators are girding for a rerun of the home-lending breakdown. NY Fed chief Bill Dudley echoed similar concerns in a speech this week, saying, "More pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures."
• Kindle goes global. Amazon.com (AMZN) announced late Tuesday a new version of its bestselling book reader that will wirelessly download books in more than 100 countries using AT&T (T) and its international roaming partners' network instead of Amazon's U.S. partner Sprint (S). The global Kindle will retail for $279, while the price of the domestic version drops by $40 to to $259. Electronic book readers are having a breakout year; in a report being released today, Forrester will revise its sales volume forecast prediction for the industry to 3M devices, up from a previous estimate of 2M.
• Fannie, Freddie lend a hand. Sources say Fannie Mae (FNM) and Freddie Mac (FRE) are readying a program that will help mortgage banks acquire the short-term credit they need to make home loans by committing in advance to purchase certain mortgages. The plan builds on an undisclosed pilot that Freddie has with lenders Provident Funding Associates and NattyMac, which provides short-term loans to mortgage lenders. GSE commitments to buy loans reduce the risk lenders will be stuck with GSE-reject loans which must then be resold at huge discounts.
• Nine EU members have 'excessive debt.' The European Commission warned nine countries, including Germany and Italy, that their budget deficits are too large. Twenty of the EU's 27 member countries are on track to breach the bloc's 3%-of-GDP limit on deficits, but the nine warned today "are neither close to the reference value nor temporary," the Commission said.
• HSBC in talks for RBS Asia assets. Sources say HSBC Holdings (HBC) is in advanced discussions to buy Royal Bank of Scotland's (RBS) retail and commercial banking assets of in China, India, and Malaysia after RBS's negotiations with Standard Chartered faltered yesterday.
• Santander: World's biggest IPO in 18 months. Santander's (STD) spinoff of part of its Brazilian unit, the world's biggest IPO in 18 months, will bring in about $8B. Spain's biggest bank hopes to open 600 branches in Brazil by 2013, and carve out new business in lending to companies and homebuyers as it bets on the Brazil's expansion while Spain wades through its worst recession in 60 years.
• BofA shortlist gets very short. Sources say Bank of America (BAC) has narrowed its list of internal candidates for CEO to Chief Risk Officer Gregory Curl and Brian Moynihan, the consumer and small-business banking chief - although the search committee continues to consider an outside hire. If the 61-year-old Curl were named CEO, it would likely be a two-year stint; Moynihan, 49, would likely be a longer-term choice.
• Europe contracts more than expected. Euro area GDP fell by 0.2% in Q2, according to Eurostat's second estimate (.pdf), far less than Q1's 2.5% contraction and the 4.8% decline of a year ago. In comparison, U.S. GDP also declined 0.2% in Q2, while Japan's GDP increased by 0.6%. The decline was sharper than the 0.1% dip estimated last month. While the report is "slightly negative," economist Nick Kounis said, it "adds nothing to the big picture: The economy very likely returned to growth in Q3, and a rather moderate recovery is likely to follow in the coming quarters."
• Office rents plunge. Office rents fell 8.5% Y/Y in Q3, the biggest drop since 1995, according to research firm Reis. The decline came as renters returned a net 19.6M square feet to landlords; YTD they've given back 64.2M square feet - the highest negative absorption rate on record. The vacancy rate of 16.5% is a five-year high. With more job losses still predicted, many say it's too soon to look for a bottom: "If employers are still shedding jobs, they are also going to shed space."
• Better economy doesn't inspire spending. Consumers are feeling an improvement in the U.S. economy, but concerns about their personal finances are limiting their spending plans. Only 19% of respondents in Discover's U.S. Spending Monitor said they expect to spend more in the next month, even though 33% now feel an improvement in economic conditions. "There appears to be no indication consumers are willing to increase their spending," Discover's Julie Loeger said.
• Mtg. apps rise. Mortgage applications increased 16.4% from a week ago, MBA said this morning, led by an 18.2% in refinancings. Average rates on 30-year fixed mortgages fell five points to 4.89%.

Earnings: Wed. Before Open

• Costco (COST): FQ4 EPS of $0.83 beats by $0.06. Revenue of $22.38B (-3.1%) in-line. Says sales were negatively impacted by ongoing softness in U.S. sales, higher employee benefit costs, and lower U.S. dollar amounts of international profits as a result of weaker foreign currencies. (PR)
• Family Dollar Stores (FDO): FQ4 EPS of $0.43 beats by $0.02. Revenue of $1.81B (+2.5%) in-line. Gross profit as a percentage of sales rose to 34.8% from 33.6% last year. Co. ends year with $439M in cash vs. $158M a year ago. (PR)

Earnings: Tue. After Close

• AngioDynamics (ANGO): FQ1 EPS of $0.09 beats by $0.01. Revenue of $50M (+13%) vs. $48M. Shares +2.1% AH. (PR)
• Yum! Brands (YUM): FQ3 EPS of $0.70 beats by $0.12. Revenue of $2.8B (-2%) in-line. Shares +1.3% AH. (PR)

Today's Markets

Asia markets were mostly higher Wednesday following Tuesday's strong U.S. showing. Europe stocks are flat at midday, and premarket futures are slightly higher.