Stocks are seeing a broad-based sell-off as investors react to very disappointing economic data. News that Intel was buying McAfee for nearly $8 billion was completely overshadowed by a rise in weekly jobless claims and a terrible report on manufacturing from the Philadelphia Reserve Bank. Markets were also digesting the latest Leading Indicators data, the semi-annual report from the Congressional Budget Office, and earnings from retailer Sears. The dollar is seeing a small bounce. Oil is down about 1.4% near $74.35 a barrel. Gold futures are up more than $3 to $1,235 an ounce. Money continues to rush into the bond market pushing yields lower. The 10-year U.S. treasury is now yielding 2.56%.
Foreign markets were mixed. Asian stocks were in rally mode but this was before the U.S. data was released. The Chinese Shanghai index rose +0.8%. The Hong Kong Hang Seng gained +024%. The oversold bounce in the Japanese NIKKEI continues with a +1.3% gain. In Europe there was some positive news regarding rising retail sales volume in Britain. Plus, Bundesbank raised their full year 2010 GDP growth forecast for Germany from +1.9% to +3.0% following the second quarter's "extraordinary" +2.2% surge in growth. Investors are still searching for safety in Europe with the yield on the 30-year German bond falling under 3%, a new record low. Unfortunately stocks plunged following the disappointing economic data in the U.S. The English FTSE index closed down -1.7%. The German DAX lost -1.8%. The French CAC-40 gave up -2.07%.
This morning before the opening bell the U.S. Labor Department said new jobless claims rose 12,000 to 500,000 last week. Last week's number was revised higher from 484,000 to 488,000. The half-million mark was completely unexpected, coming in above the range of estimates. It was also the third weekly rise in a row and marked the highest reading since November of 2009. Jobless claims peaked at 651,000 back in March 2009 and eventually declined to 427,000 in July. It would appear that corporations are trying to stay ahead of our slowing economy by reducing their headcount. The four-week moving average, which smoothes out the weekly volatility, rose 8,000 to 482,500.
The Philly Fed report on manufacturing was the next market moving report. Economists were expecting the general economic index to show a rise from 5.1 in July to 7.0 in August. Instead the index plunged to -7.7, which is the worst reading in a year. Numbers above zero indicate growth. This is alarming since manufacturing has been a strong spot in the U.S. economy. The sudden turnaround fans the flame for double-dip recession fears.
Meanwhile the New York-based Conference Board said their index of leading indicators rose +0.1% last month. Economists were expecting this index to rise +0.2% following the prior month's -0.3% decline. This index looks at ten different measures of the economy from housing, finance, manufacturing, and employment and tries to forecast economic activity over the next three to six months. After surging through the second half of 2009 this index flattened out several months ago. The lack of improvement is suggesting growth in the U.S. will be flat but at the same time it is not forecasting any new recessions.
Semiconductor chip maker Intel (INTC) made headlines this morning with the company's biggest acquisition ever. Intel offered a 60% premium to buy computer-security software maker McAfee for $7.68 billion. There is some skepticism over how Intel will merge the two businesses (Intel's hardware and McAfee's software) but Intel says they have been working closely with McAfee for over a year and a half. This acquisition will allow them to enhance a significant share of their products that connect to the Internet. Intel's CEO Paul Otellini claims that security will become even more critical going forward. The acquisition will be dilutive to Intel's earnings the first year, even out the second year, and turn accretive the third year. Shares of MFE had been hovering near $30 the last few days and gapped open near $47 for a +57% gain. Shares of Intel slipped to a new relative low with a -3.2% drop to $18.95.
Earnings results continue to trickle in. Sears Holding (SHLD), the operator of Sears and K-Mart's 4,000 stores, reported this morning. The company lost $39 million last quarter compared to a loss of $94 million a year ago. Excluding one-time items SHLD reported a loss of 19 cents a share on revenues of $10.46 billion. Wall Street was expecting a loss of 18 cents with $10.62 billion in revenues. K-Mart saw a significant jump in its gross margins (+2.3%) but this was tempered by margin declines in the Sears unit in the U.S. and Canada. Overall the company is suffering strong competition from the likes of Wal-mart and Target. Shares of SHLD are down -7.7% near $62.
In other news the Congressional Budget Office issued their semi-annual report that highlighted the nation's budget deficits. The CBO expects the 2010 fiscal year, which ends September 30th, to see a budget deficit of $1.34 trillion. That equates to 9.1% of our GDP and marks the second highest deficit in 65 years (following last year's, which was 9.9% of GDP). However, the $1.34 trillion is less than previously estimated. The CBO expects 2011's deficit to hit $1.066 trillion, up from its prior estimate of $996 billion. The CBO also said they see unemployment staying above 9% for the rest of this year, inching down toward 8.8% throughout 2011, and eventually nearing 5% in 2014.
Technically the market looks pretty weak with all of the major averages down more than -1.7%. Yet the selling has paused near Monday's lows. The path of least resistance is down. While the S&P 500 index might see a bounce near 1060 odds are growing we'll see a retest of support near the 1040 level. The small cap Russell 2000 index is off -2.6% but it is hovering near the 610 level and hasn't quite reached its Monday low near 605.
Chart of the S&P 500:
Chart of the NASDAQ:
Chart of the Russell 2000 index:
Chart of the U.S. dollar ETF (UUP):
Chart of the 10-year U.S. bond yield: