Weaker US Data Pushes Wall Street Lower: Spread Trading News

Posted on | December 15, 2009 |

Wall Street dipped back into the red today as investors fretted over the latest US economic releases and Best Buy’s disappointing outlook.

Official government data released this afternoon revealed that US wholesale prices rose nearly twice as much as anticipated in November while a separate report indicated that manufacturing activity in the New York region grew at a rate that was substantially lower than expected.

As turns out, US producer prices climbed 1.8% in November, more than twice the median economic estimate surveyed by Bloomberg while the Federal Reserve Bank of New York’s general economic index slumped to a reading of 2.6 in December from 23.5 the prior month.

The data left the market feeling somewhat insecure over the type of policies the Federal Reserve will have to implement in order to tame rising inflationary pressures without hampering growth.

In the meantime, another report unveiled stronger-than-expected figures for US industrial production, which measures the output at factories, mines and utilities. The gauge rose by 0.8% in November, beating Bloomberg’s expectations and helping offset some of the negativity brought on by the bleak manufacturing data.

Elsewhere, shares of the biggest US electronics retailer Best Buy plunged 7.5% to $41.97 this afternoon after saying that sales of less profitable notebook computers and televisions will weigh on its fourth-quarter gross profit margins.

The company’s third-quarter net income was encouraging, however, coming in at $227 million, or 53 cents a share. This was substantially higher than the prior year’s comparative of $52 million, or 13 cents, when Best Buy took a writedown on its stake in Carphone Warehouse. It was also 20% higher than Bloomberg’s average analyst estimate of 44 cents a share.

Total sales, meanwhile, increased 4.6% to $12 billion, in line with expectations. The rise in sales was helped by the addition of 127 new stores over the year.

Looking ahead, Best Buy upped its full-year profit guidance (excluding one-off items) to $3 - $3.15 a share. This compares with an earlier target of $2.70 - $3 a share. In addition, the electronics retailer said it expects full-year revenue of $49 billion - $49.5 billion, partially driven by higher sales of notebook computers and lower-priced flat panel televisions.

In my opinion, Best Buy’s 7.5% drop is looking a bit overdone today. Although negative stock market sentiment may drag this stock down a little further, I would definitely consider keeping this stock on my watch list.

By around 3.30pm (London time) the Dow Jones Industrial Average was 20.40 points (-0.19%) lower at 1048.65 while the broader S&P 500 was 2.27 points (-0.20%) below its previous close at 1111.84. The Nasdaq, meanwhile, fell 2.83 points (-0.16%) to 1806.26.

Financial shares were predominantly trading lower this afternoon, with the likes of Citigroup and Bank of America down by 2% to $3.61 and $15.31 respectively. Wells Fargo managed to buck the negative trend, however, and advance 2.6% to $26.14 a share after announcing a $10.4 billion share sale that will help it repay all of the government’s bail-out funds.

Elsewhere, Hyatt Hotels gained 1.6% to $29.98 after the Abu Dhabi Investment Authority, which is among the world’s biggest sovereign wealth funds, acquired a 10.9% stake in the hotel group. In the meantime, Goldman Sachs, Citigroup and Deutsche Bank all rate Hyatt’s shares with a ‘buy’ recommendation. [1]

Starwood Hotels & Resorts Worldwide also benefited from a broker update. Its share gained 2.8% to $36.62 after Bank of America Merrill Lynch upped its rating from ‘underperform’ to ‘buy’. The analysts said: ‘we believe there will be a strong cyclical recovery in lodging earnings beginning in late 2010.’ [2]

Looking ahead, the US monetary policy decision and accompanying statement will be released tomorrow. According to Bloomberg, interest rates will remain unchanged near zero and the Fed may say that interest rates will stay low for a ‘prolonged period.’

[1] Source: Bloomberg News (15 December 2009)
[2] Source: Bloomberg News: (15 December 2009)

By Anthony Grech, Research Analyst, IG Index.

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