Stock Market Update - Thursday, October 7, 2010 Cautious Upward Outlook

Stock Market Update
Thursday, October 7, 2010

Latest US Economic News Headlines:

USA EQUITY INDEXES: (Oct. 7, 4:00 PM EDT)
Dow Jones 10,948.58     -19.07     (-0.17%)
S&P 500    1,158.06     -1.91     (-0.16%)
Nasdaq     2,383.67     +3.01     (0.13%)

EQUITY TRADING ACTIVITY 4:00 P.M.
                          Advancing       Declining
NYSE          371,232,448     526,430,048
AMEX             3,924,975         9,307,185
NASDAQ 1,158,061,883     648,488,252


Dow Jones CLOSING Averages: DJIA 10,948.58 DN 19.07

  30 INDUS     10,948.58 DN   19.07 OR    0.17%
  20 TRANSP     4,576.64 DN    6.93 OR    0.15%
  15 UTILS        402.21 UP    0.59 OR    0.15%
  65 STOCKS     3,784.90 DN    4.15 OR    0.11%

US DOLLAR FUTURES INDEX DXY, 4:00 PM EDT: 77.44  0.06 (0.08%)

US COMMODITY PRICES: (Oct. 7, 4:00 PM EDT)

Crude Oil     81.37     - 0.37%
Natural Gas     3.62     + 0.14%
Gasoline     2.11     -
Heating Oil     2.25     -
Gold     1334.53     - 1.10%
Silver     22.51     - 2.89%
Copper     3.66     - 2.22%

US SECTOR SUMMARY: (Oct. 7, 2010 4 PM EDT)
Basic Materials     +2.22%
Capital Goods      +2.20%
Conglomerates     +1.91%
Cons. Cyclical     +1.73%
Cons. Non-Cyclical+1.19%
Energy                +1.59%
Financial             +1.73%
Healthcare          +1.32%
Services             +1.60%
Technology        +1.68%
Transportation    +1.86%
Utilities               +1.04%


US DOLLAR CLIMBS MARKET MIXED
US Dollar Hits Support US Stocks Decline Slightly Ahead Of 3Q, Jobs Data

Stocks struggle as dollar gains ground. US Stocks fell deeper into the red with fresh lows Thursday afternoon, as the dollar gained ground on the euro and investors saw encouraging employment and retail-sales numbers, and looked  ahead to the monthly jobs report due Friday.

As the US Dollar bounced off the 77 index value, currency battles across the globe risk undermining the global economy, International Monetary Fund Managing Director Dominique Strauss-Kahn warned Thursday. The dollar recovered from a broad slump against most of its rivals as investors pared bets on riskier assets.

The IMF is the appropriate forum to make progress on resolving currency tensions, including getting China to appreciate its undervalued currency, Strauss-Kahn said at the start of annual meetings of the IMF and World Bank.

The Dow Jones Industrial Average fell 69 points in recent trading. Its telecommunications components led the decline, with AT&T off 1.2% and Verizon Communications off 0.8%. Alcoa wavered between small gains and losses ahead of the aluminum giant's third-quarter earnings report due after the close, which marks the start of the reporting season. After hours reports are expected from Alcoa, and Micron. Alcoa warns that its profit may decline 29% on weak US dollar.

The Nasdaq Composite eked out an increase of less than a point. The Standard & Poor's 500-stock index shed 0.1% to 1159. Materials and energy companies slumped while utilities and financials rose.

The mixed activity came as investors grew hesitant to make major moves ahead of third-quarter earnings reports.

"We're just flatlined until we get the actual announcements on the quarter," said Michael Sansoterra, portfolio manager of the Ridgeworth Large Cap Growth Fund. "We've got earnings season on the cusp and the market's done real well in advance of that. Now we're going to get a bunch of data that either supports or refutes that, so this is the lull before the storm."


Unemployment Rate Ticks Up To 10.1% According To Gallup

Now even Gallup is warning that the government data tomorrow will likely understimate the severity of the job situation.


Friday's Unemployment Rate Report Likely to Understate

The government's final unemployment report before the midterm elections is based on job market conditions around mid-September. Gallup's modeling of the unemployment rate is consistent with Tuesday's ADP report of a decline of 39,000 private-sector jobs, and indicates that the government's national unemployment rate in September will be in the 9.6% to 9.8% range. This is based on Gallup's mid-September measurements and the continuing decline Gallup is seeing in the U.S. workforce during 2010.

While everyone is focused on tomorrow's NFP which will likely indicate a 9.9% unemployment rate, Gallup today confirmed that the unemployment rate has once again pushed into double digit territory. "employment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September -- up sharply from 9.3% in August.

The US government is set to release its September jobs numbers Friday morning. While economists are expecting to see fewer payroll cuts than reported in August, they still anticipate a decrease of 10,000 U.S. jobs and a slight rise in unemployment.

Weekly jobs data released Thursday showed the number of U.S. workers filing new claims for jobless benefits unexpectedly fell last week to their lowest level since July 10. The four-week moving average, which aims to smooth volatility in the data, also declined.

Also providing some encouragement, retailers reporting their same-store sales for September mostly topped expectations, with American Eagle Outfitters, Abercrombie & Fitch and Limited Brands among the standouts. American Eagle-which also boosted its fiscal third-quarter earnings outlook-climbed 8.6%, while Abercrombie jumped 9.5% and Limited added 3.9%.

PepsiCo Trims Forecast, Bets on Healthier Food
Soft drink and snacks maker PepsiCo Inc trimmed its full-year profit forecast and formed a new business unit to drive growth in the healthier food market surge.

PepsiCo's fiscal 3Q earnings rise to $1.92 billion, or $1.19 a share, boosted by its acquisition of independent bottlers. But the soda and chips giant trims the top end of its 2010 earnings-growth forecast and its shares drop 4%.

Even if Friday's jobs report disappoints, as the monthly private-sector employment data did on Wednesday, stocks could still get a boost, as weak numbers would raise expectations for the Federal Reserve to hit the market with additional stimulus measures more quickly.

"Even the people who didn't believe it would happen, those people are now believing we'll see" another round of stimulus from the Fed, Sansoterra said. "If you believe that, we'll get lower bond yields and a lower dollar."

The dollar has been slumping on the expectations for more stimulus measures from the Fed. Meanwhile, investors have been piling into bonds and stocks.


Alcoa 3Q Net Drops 21%

Alcoa's shares, which were halted in after-hours trading ahead of the news, closed at $12.20. The stock is down 24% this year after rising nearly 50% in 2009.

Alcoa Inc.'s (AA) third-quarter profit slid 21% as expenses grew and the aluminum producer recorded a charge related to an alumina refinery, which masked higher demand and improved pricing, with revenue topping expectations.

The company has benefited from a rebound in aluminum pricing, helping it report improved results over the past several quarters. But aluminum prices fell 2.1% sequentially as concerns remain about the slow economic recovery.

Still, Alcoa raised its full-year outlook for aluminum consumption to 13% growth from the July view of 12%, with Chairman and Chief Executive Klaus Kleinfeld saying Alcoa saw markets strengthen.



CONSUMER AREN'T CONSUMING
US Consumers Reduce Borrowing $3.34 Billion In August

Americans reduced borrowing for a seventh-consecutive month in August, a trend of thrift that is restraining the economic recovery.

Total consumer credit outstanding declined for the seventh straight month in August as credit card debt continued to fall.

The Federal Reserve said on Thursday total outstanding credit, which covers everything from car loans to credit cards, fell by $3.34 billion after dropping $4.09 billion in July.

Revolving, or credit-card credit, fell $4.99 billion in August after a $4.98 billion fall the prior month. That marked the 24th consecutive month credit-card debt decreased.

Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and vacations, increased $1.65 billion after increasing $888.59 million in July. It was the fourth straight month of gains.

Consumer credit outstanding decreased at a seasonally adjusted annual rate of 1.7%, down by $3.3 billion to $2.41 trillion, a Federal Reserve report said Thursday.

The decline was worse than expected. Economists surveyed by Dow Jones Newswires predicted a $3.0 billion decline. In addition, the Fed reported July consumer credit fell more than previously thought; the Fed revised the decrease to $4.1 billion from $3.6 billion.

The report showed revolving credit dropped almost $5.0 billion dollars, or 7.2%, to $822.25 billion in August. The last time credit-card debt rose was August 2008.As personal bankruptcies continue to surge in America, the outstanding debt numbers are declining.

But loans for cars, tuition and vacations, known as "non-revolving credit," climbed a fourth-straight time. The consumer-credit report doesn't include numbers on home mortgages and other real estate-secured loans. Still, the data provide a meaningful snapshot on consumer spending, a big driver of the economy.

Consumers are spending, but only modestly, which is preventing the economy from growing strongly out of the deep recession. They're also taking on less debt. Their saving rate rose in August to 5.8%.

Consumer caution comes from a high U.S. unemployment rate and the drop in the value of their homes. The government will report Friday on U.S. joblessness in September, and economists surveyed by Dow Jones Newswires expect the unemployment rate to climb, to 9.7% from 9.6% in August.

Credit-card quality measures are stressed. U.S. credit-card holders more than 60 days behind on their payments hit a 23-month low in the August collection period, according to Fitch Ratings. But charge-offs, or payments that banks do not expect to collect, rebounded after hitting a 16-month low in July.

"Total consumer credit is likely still depressed by persistent charge-offs and probably somewhat understates actual credit growth," Barclays Capital analyst Theresa Chen wrote in a research note. "That said, the broad trend of consumer credit still looks relatively weak, although the pace of contraction has decelerated."

To save money, shoppers have turned to discount stores for cheaper products. Family Dollar Inc.'s (FDO) fiscal fourth-quarter earnings rose 23%. Merchants all over are offering discounts and promotions to lure the value-conscious.

Consumers don't have jobs. Those that do are paying off old bills, or saving as much money as possible."As long as consumers are de-leveraging, the trend growth in real consumer spending has to be slower than the gains in real disposable income which, given no additional monetary or fiscal stimulus and weak private-sector hiring, has been sluggish," Insight Economics analyst Steven Wood said.



GRIM US JOB MARKET
US Job Openings Barely Budged In Aug; Hiring Remains Sluggish

The number of job openings in the U.S. barely climbed in August as employers trimmed hiring slightly.

Job openings grew by just 60,000 to 3.2 million at the end of August, the U.S. Labor Department said Thursday. Most of the gains came in the professional and business-services sectors and from the government.

Despite the anemic growth, there was some good news: The number of unemployed workers available for each job opening fell to 4.6. That's down from 4.8 in July and a peak of 6.2 in November 2009.

Employers Held off on Hiring New Workers
In August, employers made 4.1 million hires--down from 4.3 million in July. Employees remained reluctant to leave their jobs. The number of people voluntarily quitting their jobs in August.


US DOLLAR

The U.S. Dollar Index closed up Thursday after bouncing off the 77 support area, and closed up .07% percent on the day at 77.45.

At the beginning of the day, the U.S. Dollar Index, tracking the U.S. currency against the dollar, continued its tumble with a 0.2% drop Thursday morning. Treasurys rose, pushing the yield on the two-year note to a record low of 0.359% while the yield on the 10-year fell to 2.39%.

The dollar's fall came as the euro climbed to $1.3940, from $1.3936 late Wednesday. European Central Bank President Jean-Claude Trichet said the euro zone's economic recovery should proceed at moderate speed, albeit with risk and uncertainty "still prevailing."


US NATURAL GAS OVERLOAD
Futures Slide After Larger-Than-Expected Storage Build 

Futures Close Down 6.4% At $3.617/MMBtu. Natural gas futures neared 11-month lows Thursday after a larger-than-expected build in inventories added to worries about an abundance of supply in the U.S. market.


Natural gas for November delivery fell 16.5 cents, or 4.3%, to $3.700 per million British thermal units on the New York Mercantile Exchange. The benchmark contract fell as low as $3.692/MMBtu after the report, near the 11-month low of $3.651/MMBtu set in late August.  

The U.S. Energy Information Administration said natural gas inventories grew by 85 billion cubic feet last week, more than the consensus estimate of a 78-bcf build.

Natural gas in U.S. storage for the week ended Oct. 1 stood at 3.499 trillion cubic feet, 6.7% above the five-year average, and 4.1% below last year's figure. The week's injection was well above both the five-year average increase of 67 bcf and last year's 68-bcf increase. Market participants pay close attention to these reports because they provide an indicator of balance between gas supplies and demand.

Storage builds this summer were below average, as record heat spurred demand for gas-fired electricity to cool homes and businesses. But with more temperate weather setting in, some recent weekly injections have been higher than average, pressuring futures lower and stifling attempts at a seasonal rally. Gas prices typically reach a seasonal bottom in August or September before rising in anticipation of winter's gas heating needs.

"There's not too much to get excited about looking out the next two months," said Cameron Horwitz, an analyst with Canaccord Genuity in Houston. "The rig count is still relatively high, production is at least flat if not climbing. I think absolutely you could test" August's lows.


Futures Fell On Oversupply Worry Ahead Of Storage Data

Natural gas futures fell Thursday ahead of a government report expected to show that gas stockpiles increased by more than average last week, adding pressure to an already well supplied market.
Also Crude-oil futures and gold futures slipped, reversing prior gains.

Natural gas for November delivery fell 8.5 cents, or 2.2%, to $3.780 a million British thermal units on the New York Mercantile Exchange. Since hitting an 11-month low in late August, futures have been bound between about $3.75/MMBtu and $4.05/MMBtu, as traders have been reluctant to bet that the market would fall much lower, but high supplies stifled attempts at a seasonal rally.

Futures prices typically reach a seasonal bottom in August or September before rising on anticipation of winter's gas heating needs.

Traders were awaiting a report from the U.S. Energy Information Administration expected to show that 78 billion cubic feet of gas were added to storage during the week ended Oct. 1, according to a Dow Jones Newswires survey. The estimate is well above the week's five-year average build of 67 bcf and last year's 68-bcf increase. The estimate would put U.S. storage on the week at 6.5% above the five-year average.

  The EIA is scheduled to release its storage data Thursday at 10:30 a.m. EDT.

Macquarie Research Thursday cut its natural gas price forecasts, reducing next year's target to $4.40/MMBtu and scaling back 2012 estimates to $4.90/MMBtu.

  "The U.S. has no shortage of available shale gas plays, while new basins across the globe are also awaiting development," analysts with Macquarie wrote in a client note. "With such high production levels, the winter premium should shrink, taking down the annual forecasts."

U.S. gas production has increased in recent years even as demand growth slowed, as more production from unconventional shale gas formations comes online. The supply growth has helped to moderate price swings in what was one of the most volatile commodity markets of the past decade.



CRUDE OIL FUTURES DECLINE
Crude Retreats From Five-Months Highs Stumbles As Dollar Climbs

Crude futures retreated from fresh five-month highs Thursday as a rebound in the dollar caused traders to question the strength of the recent rally.

Light, sweet crude for November delivery settled $1.56, down 1.9%, lower at $81.67 a barrel on the New York Mercantile Exchange after trading as high as $84.43 earlier in the session. Brent crude on the ICE futures exchange traded $1.64 lower at $83.42 a barrel.


Crude Rally Stumbles On Dollar Rebound

"As the dollar started to rebound and the equity markets turned this morning, since the market pushed to five-month highs, you began to see rising nervousness that the rally has overextended itself," said Gene McGillian, a broker and analyst with Tradition Energy. "We are starting to reach an area that without a change in the underlying fundamental picture of the market[,]...the resistance is going to get stronger."

Investors have been running from the dollar on expectations the Federal Reserve will act again to stimulate the economy. Other central banks are also expected to act in ways that could devalue their currencies, which has led to gains in hard assets, like commodities. The beginnings of a potential race to devalue currencies has trumped worries about growing crude and fuel product inventories, which are near 27-year highs. But as crude nears the peak of earlier rallies this year, traders are nervous a correction could be ahead.

The U.S. Department of Energy said Wednesday domestic oil stockpiles rose by 3.1 million barrels in the week ended Oct. 1, a much larger increase than expected.

But stockpiles of gasoline and distillates, which include heating oil and diesel, posted declines that were bigger than anticipated.

Front-month November reformulated gasoline blendstock, or RBOB, recently traded 0.28 cents lower at $2.1531 a gallon. November heating oil recently traded 1.31 cents lower at $2.2947 a gallon.



PRECIOUS METALS PLAY AGAINST THE DOLLAR
Currency Fears Boost Comex Gold Rally

Comex gold saw sustained investor support Thursday amid global fears of falling currency values and the weaker dollar.

The most actively traded contract, for December delivery, was recently up 0.8%, or $10.60, at $1,358.30 per troy ounce on the Comex division of the New York Mercantile Exchange.

  Gold prices continue to set new record highs amid growing international concern over currency value fluctuations. Investors have been flocking to gold as a safe haven investment because of its status as an alternative currency and a store of value.

The ICE Dollar index, which tracks the dollar against a trade-weighted basket of currencies, was 77.026 from 77.386 yesterday, hitting the lowest point since January earlier in the session.

The dollar's decline against other currencies comes despite recent moves by the Bank of Japan to cut interest rates to zero and launch another monetary stimulus program to lower the value of the yen.

Gold has benefited from the so-called currency wars, as governments around the world move to lower home currency values and boost internal economic growth. These policies worry investors, as they hold the potential to weaken currencies and increase inflation, without delivering better economic growth.

  "When there are currency upheavals like we have now gold seems to be a good deposit against currency holdings, because gold maintains purchasing power," said George Gero, vice president RBC Capital Markets Global Futures.

Gold prices are also benefiting from growing investor concern that the Federal Reserve will announce a similar monetary stimulus program before year end. Gold is seen as a hedge against inflation and a store of value, attracting investors who worry the monetary stimulus will devalue the dollar and increase inflation.

But analysts at Macquarie Group warn that gold's rally is too reliant on dollar weakness. The drop in the dollar "pretty much accounts for all the gains" in the gold price, making further gains in gold "contingent" on the dollar dropping further, Macquarie said in a note to clients.


US MORTGAGE RATE DECLINE
US Mortgage Rates Fall; 30-Year Fixed At Fresh Low Of 4.27%

Average mortgage rates in the U.S. continued their fall in the past week, with the average rates on 30-year fixed and two other loans setting a record low, Freddie Mac (FMCC) said Thursday.

  Rates have slumped for months because Treasurys yields have slid due to economic uncertainty. They  resumed their retreat after increasing for a few weeks beginning at the end of August. Mortgage rates generally track the yields, which move inversely to Treasury prices.

  Data suggesting inflation is "running at a tepid pace at best" have allowed "mortgage rates to ease to new or near record lows this week," said Freddie Mac Chief Economist Frank Nothaft.

  The 30-year fixed-rate mortgage averaged 4.27% for the week ended Thursday, down from the prior week's 4.32% and 4.87% a year ago. Freddie has been tracking such rates since 1971.

  The 15-year fixed mortgage averaged 3.72%, down from 3.75% the previous week and 4.33% in the like 2009 period. The latest week's figure was the lowest since Freddie started tracking such loans in 1991.

  Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 3.47%, another low. They were down from the prior week's 3.52% and 4.35% a year earlier. One-year Treasury-indexed adjustable rate mortgages were 3.4%, down from 3.48% on the week and 4.53% a year earlier.

To obtain the rates, the 30-year and one-year mortgages required payment of an average 0.8 point and the others required an average 0.7 point, except five-year Treasury-indexed hybrid ARMS, which required 0.6 point. A point is 1% of the mortgage amount, charged as prepaid interest.



US DOLLAR DOWN EARLY TRADING STOCKS RISE
US Stocks Rise, DJIA Within Reach Of 11000

U.S. stocks rose Thursday morning, putting the Dow Jones Industrial Average within reach of the key 11000 level as better-than-expected employment and retail-sales numbers encouraged investors ahead of quarterly earnings reports and monthly jobs data.

The Dow climbed 25 points, or 0.2%, to 10993. Alcoa led the Dow's ascent with a 1.6% increase ahead of the aluminum giant's third-quarter earnings report due after the close, marking the start of the reporting season.

The Nasdaq Composite rose 0.4% to 2390. The Standard & Poor's 500 index added 0.3% to 1163. The financial and technology sectors led the gains while consumer-discretionary stocks were also strong.

Consumer stocks got a boost as retailers reporting their same-store sales for September mostly topped expectations, with American Eagle Outfitters, Abercrombie & Fitch and Limited Brands among the standouts. American Eagle--which also boosted its fiscal third-quarter earnings outlook--climbed 4.5%, while Abercrombie jumped 8.6% and Limited added 3.3%.

Also lifting sentiment, the number of U.S. workers filing new claims for jobless benefits unexpectedly fell last week to their lowest level since July 10. The four-week moving average, which aims to smooth volatility in the data, also declined.

The weekly numbers come a day before the Labor Department releases its monthly jobs report for September. While economists are expecting to see fewer payroll cuts than reported in August, they still anticipate a decrease of 10,000 U.S. jobs and a slight rise in unemployment.

Still, even if Friday's jobs report disappoints--as monthly private-sector employment data did Wednesday--stocks could still get a boost as weak numbers would raise expectations for the Federal Reserve to hit the market with additional stimulus measures more quickly.

The dollar has been on a decline recently as expectations have increased for the Fed to make more moves to prop up the economy. Meanwhile, investors have been piling into bonds, commodities and stocks.

The U.S. Dollar Index, tracking the U.S. currency against the dollar, continued its tumble with a 0.5% drop Thursday. Treasurys rose, pushing the yield on the two-year note to a record low of 0.359% while the yield on the 10-year fell to 2.39%. Crude-oil futures advanced above $84 a barrel and gold futures hit a fresh record high.

The dollar's fall came as the euro climbed to $1.3999. European Central Bank President Jean-Claude Trichet said the euro zone's economic recovery should proceed at moderate speed, albeit with risk and uncertainty "still prevailing."


US RETAIL MIXED OUTLOOK
US Retailers' Sept. Sales Strong, Raising Holiday Hopes

Back-to-school buying finally arrived, aided by plenty of promotions, with most retailers' posting September sales that were ahead of expectations and raising hopes for the holidays.

  Teen retailers, most vulnerable to the fall season, were being joined by department stores and general apparel retailers in producing strong numbers, suggesting that some pent up buying demand was released.

But the sales that retailers wrung up in September came at a cost, with the extremely promotional environment appearing to have sparked extra buying. "Consumers remained highly value-centric and purchased largely only with coupon in hand or because of special offers," said Thomas Filandro, retail analyst at Susquehanna Financial Group.

Several retailers, including BJ's Wholesale Club Inc. (BJ), TJX Cos. (TJX) and Wet Seal Inc. (WTSLA) noted that sales fell off after strength earlier in the month. The slowdown could cause a pause in October before the resumption of buying for the holiday season. Various projections put sales gains for the November to December period between 2% to 3.5%.

Retailers themselves continue to remain cautious. J.C. Penney Co. (JCP), while posting a 5.1% rise in sales at stores open at least a year, when a 3.1% gain was expected, cited "the continuation of a highly competitive promotional environment and ongoing volatility with regard to consumer discretionary spending."

Among other department stores, Macy's Inc. (M), Nordstrom Inc. (JWN) and Saks Inc. (SKS) all exceeded analysts' expectations, while Kohl's Corp. (KSS), which has been a perrennial front runner, came up just a bit short.

Mass merchant Target Corp. (TGT) missed projections, posting a 1.3% rise, when a 1.9% gain was expected, although the company said it expects initiatives like 5% rebates on credit card purchases to increase its market share during the upcoming holiday season.

Teen retailers, the most vulnerable group to the back to school buying, turned in consistently better-than-expected numbers, reflecting the later start to the season and the kinds of promotions they were presenting. Some of the stores were offering discounts on top of already marked down merchandise towards the end of the month.

Zumiez Inc. (ZUMZ) and American Eagle Outfitters Inc. (AEO) raised their-quarter earnings guidance after turning in strong numbers. Among others in the group, Aeropostale Inc. (ARO) posted a 3% rise in sales when a 2.4% decline was expected, Hot Topic (HOTT) posted a 2.6% drop, when a 3.5% decline was projected; and Wet Seal's sales declined 0.7% when analysts were expecting a 2.3% drop.

Limited Brands Inc. (LTD), which counts adults and teens among its shoppers, smashed through estimates, posting a 12% rise in sales when 4.1% was expected. The company's Victoria's Secret unit led the upsurge, posting 13% growth, followed closely by Bath & Body Works at 11%.

The 28 retailers tracked by Thomson Reuters ended up showing a 2.8% rise for September at stores open more than a year, beating expectations for a 2.1% gain. Wal-Mart Stores Inc. (WMT) is not included in the group.

Retailers as a group were up against the first positive comparable store sales number in a year, when September 2009 showed a 0.6% advance.

While the year-ago gain was small, there is still significance in beating a positive number because it can supply a psychological boost amid what is still a lot of downbeat sentiment, said Mike Berry, director of industry research for the SpendingPulse unit of MasterCard Inc. (MA). "Anything that can perhaps be viewed as positive news can perhaps make a difference."

Still, "We're seeing a continuation of consumers buying close to their needs, in this case back to school," Berry said.

J.C. Penney Chief Executive Myron Ullman had said earlier in the month that the company exceeded internal expectations for back-to-school sales.

And, "Obviously, back-to-school is equivalent to holiday for the 'young businesses,' young men's, juniors and the kids businesses," Ullman said.



Fed Balance Sheet Expands Slightly In Latest Week

The U.S. Federal Reserve's balance sheet expanded slightly in the latest week as the central bank's holdings of U.S. Treasury securities rose.

The Fed's asset holdings in the week ended Oct. 6 totaled $2.311 trillion, compared with $2.302 trillion a week earlier, the Fed said in a weekly report released Thursday.

In the latest week, the Fed's holdings of U.S. Treasury securities rose to $819.07 billion Wednesday from $811.67 billion a week earlier. Holdings of mortgage-backed securities held steady at $1.079 trillion Wednesday.

Facing a slowing economy, the central bank in August decided to reinvest the proceeds of maturing mortgage bonds into U.S. Treasurys to prevent its portfolio of securities from shrinking and borrowing rates from rising. Fed officials are now considering buying more Treasurys outright to jump-start the economy.

The report showed total borrowing from the Fed's discount lending window slid to $49.48 billion Wednesday from $49.77 billion a week earlier. Borrowing by commercial banks rose to $110 million Wednesday from $99 million a week earlier.

U.S. government securities held in custody on behalf of foreign official accounts increased to $3.253 trillion, from $3.238 trillion in the previous week.

U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.501 trillion from $2.485 trillion in the previous week. Holdings of agency securities, meanwhile, fell to $751.75 billion from the prior week's $752.54 billion.

Further data on the Fed's balance sheet, including a breakdown of district-by-district discount window borrowing, can be found at:  http://federalreserve.gov/releases/h41/current/h41.pdf.


US CITIES ON THE VERGE OF BANKRUPTCY
City Debt Trouble Will Hurt US Economic Growth-80% Can't Meet Budgets


In a report issued Wednesday by the National League (NLC), US Cities are facing a growing economic uncertainty. A large number of US municipalities are in grave conditions. Many are reducing police and fire protection services. Most are reducing their public works departments, and most are failing to meet retirement obligations, preparing to bankrupt their cities to get out of the growing stranglehold of growing pension obligations. 

Since businesses depend on local governments for many services that allow for the smooth running of commerce, declines in city spending will cause more uncertainty among business owners.

The NLC report paints a depressing picture of city finances. After adjusting for inflation, revenues are expected to drop 3.2% this year, the fourth consecutive yearly decline.

To compensate, local governments have had to reduce spending by 2.3%, the largest spending cut in the 25-year history of the survey.

The housing bust and recession have cut into property and sales taxes--the two largest categories of city revenues. And the NLC says it could take 18 to 24 months until all recessionary impacts have made their way through city budgets.


That's because property taxes are based on the most recent assessments of residential and commercial property values. But assessment cycles can last for years, so many cities have not yet accounted for the plunge in real-estate prices. (Home prices in the top 20 cities are down 27.9% from their 2006 peak, according to the latest S&P/Case-Shiller survey.)

Given that lagged impact, 80% of finance officers in the NLC survey forecast their cities will be less able to meet their budget needs in 2011.

In other words, more spending cuts are on the way.

For the economic outlook, the problems of city governments are problems for local businesses.
Companies rely mainly on local governments to plow roads in winter, fill potholes, approve building projects, issue professional licenses and collect the garbage on time. If these services are reduced or delayed, companies will find it harder to sell their products, move goods or open new facilities. Delayed responses by police and fire departments could be more damaging.


In addition, one way cities will close the gap, says the NLC report, is by increasing fees for public licenses and services--fees that usually hit businesses more than residents.


Local government problems add further uncertainty for business decision-making. Economists have begun to link the high degree of uncertainty to the weak level of hiring so far in this recovery.


The NLC survey makes it clear that more layoffs are on the way as cities struggle to provide needed services in an era of reduced revenues.




BEFORE THE BELL:

US Jobless Claims 445,000
US workers filing new claims for jobless benefits unexpectedly fell last week to their lowest level since July 10.

US Stock Futures Edge Up As Jobless Claims Decline.




Canadian Market: 
Toronto Stocks Close Lower, Pressured By Gold, Energy

Toronto stocks closed lower Thursday, led by gold and energy producers, as investors took advantage of recent gains to take profits.

The S&P/TSX Composite Index fell 55.79 points, or 0.4%, to 12455.93. Declines exceeded advances 871 to 737. Trading volume was 521.7 million shares, up from Wednesday's total of 508.5 million shares. The S&P/TSX 60 Index closed down 3.48 points, or 0.5%, to 720.32.


Canada's Dollar Is Near 5-Month High
Toronto Stocks Lower At Midday, Led By Gold, Commodity Producers

The stock market was down at midday Thursday, as shares of gold, mineral and energy producers tumbled on lower commodity prices.

At 11:45 a.m. EDT (1545 GMT), the S&P/TSX Composite Index was down 82.05 points, or 0.7%, at 12419.67. Declines led advances 775 to 592. Trading volume was 265.7 million shares. The S&P/TSX 60 Index was down 5.28 points, or 0.7%, to 718.52.

Toronto Indexes, Volume; 4:00 PM EDT Composite Down 55.79

 S&P/TSX Composite   12445.93  off  55.79  or 0.4%
 S&P/TSX 60 Index      720.32  off   3.48  or 0.5%
 Financials            177.94  off   0.56  or 0.3%
 Materials             392.00  off   6.51  or 1.6%
 Energy                288.31  off   1.79  or 0.6%
 Industrials           105.91  up    0.66  or 0.6%
 IT                     27.84  up    0.09  or 0.3%

   Volume           Thursday    Wednesday
   3-4:15              77.3M       88.9M
   9:30-4:15          521.8M      509.4M


Toronto Most Actives At 2:15 PM EDT

Bankers Petroleum               18,624,686  7.06  off  0.29
Horizons NYMEX Natural Gas Bull 13,706,533  3.30  off  0.37
Andean Resources                10,451,987  6.21  off  0.14
Bombardier Inc. B                6,561,116  5.24  up   0.06
Eastern Platinum                 6,398,581  1.50  unchanged
Yamana Gold                      5,567,024 11.58  off  0.35
Minera Andes                     5,571,635  2.01  up   0.25
Crocodile Gold                   5,380,384  1.45  off  0.06
iShares Cdn S&P/TSX 60 Index     5,083,184 18.05  off  0.10
Manulife Financial               4,901,891 12.57  off  0.14




South American Markets:

 BRAZIL:

Brazil Bovespa Ends Lower As Inflation, Petrobras Weigh

At the end of the day, Petrobras (PBR, PETR4.BR) was 2.2% lower at BRL25.30.

Brazil's Bovespa stocks index dropped away from recent gains Thursday to end below the 70,000 point mark as disappointing inflation data and concerns over the outlook for state oil company Petrobras (PBR, PETR4.BR) weighed against the local market.

The main Sao Paulo stocks index ended 0.9% lower at 69,918 points after ending at 70,541 points Wednesday. Volume was heavy, with 11.0 billion Brazilian reals ($6.5 billion) in shares changing hands.

The index began the session on an upswing on encouraging jobless claims data in the U.S., which dropped by 11,000 in the last week according to the Labor Department.

The local rally didn't last long, however, as a surge in local inflation and concerns over monetary policy stirred the market.

Brazil's IPCA consumer price index registered a stronger-than-hoped-for increase in September in reaction to rising food prices, according to the country's IBGE statistics institute. The index made its largest leap since April, rising by 0.45% in September from a 0.04% increase in August. The figure raised 12-month IPCA inflation to 4.7% from 4.5% in August. Brazil's government has set a year-end inflation target of 4.5%.

Among materials sector shares, mining giant Vale (VALE, VALE5.BR) fell 0.1% to BRL47.40 and steelmaker Gerdau (GGB, GGBR4.BR) was down 1.7% to BRL21.73.

In the banking sector, top private bank Banco Itau-Unibanco (ITUB, ITUB4.BR) was down 0.1% to BRL41.48, and rival Bradesco bank (BBD, BBDC4.BR) was 0.4% lower at BRL34.72.

Shares of leading fixed-line telecom operator Oi (TNE) fell 1.8% to BRL24.62, and Minas Gerais power company Cemig (GMIG4.BR) rose 0.1% to BRL28.15. Shares of leading airline TAM (TAMM4.BR) rose 0.8% to BRL38.30 and rival Gol Linhas Aereas (GOLL4.BR) fell 1.2% to BRL27.30.


Brazil's Real Closes Lower 
Eyes Turn To G-20, US Jobs Data

Brazil's real bounced around on Thursday amid volatile global markets, and ended the day slightly weaker against the dollar, as investors took some profits ahead of the forthcoming meetings of finance officials in Washington.

  "The entire market overseas turned around," said Eduardo Duarte, a trader at the Interbolsa brokerage in Sao Paulo. "Some of the profits are being taken off the table."

The real had strengthened sharply in the morning, at one point touching BRL1.699 per dollar, but ended at BRL1.6843, from Wednesday's close of BRL1.6800.

The broader trend of appreciation of the Brazilian real is unlikely to be reversed any time soon, as most market watchers have shrugged off the measures unveiled by the government earlier this week.

A tax on foreign investments in fixed income securities was raised to 4% from 2%, and the increase was then extended to include equity funds and multipurpose funds, although investments in individual stocks aren't affected. The government also authorized the Treasury to buy up another $10.7 billion from the spot and future markets, ostensibly to cover debt payments, but in practice to help absorb some of the strong flow of foreign exchange into Brazil.

But the measures were "pretty much expected" and interpreted as "still being weak," said Interbolsa's Duarte. Although they may have slowed the real's gains, they can't reverse the trend, he said.

The strength of the real is being felt across large swathes of the economy, especially those which have to compete against imports, which become cheaper as the real gains.

Analysts said that flat steel prices in Brazil have sunk to just 10%-15% above prices for imported steel, as battling against imports becomes Brazilian steelmakers' biggest concern. The local premium was for many years as much as 20-30% but may fall further as imports continue to surge, Goldman Sachs and Deutsche Bank analysts said.

Brazilian car exports continue to recover this year despite the strength of the Brazilian currency, but imports are still gaining ground amid the rapid strengthening of the real, the Brazilian Motor Vehicle Manufacturers Association, or Anfavea, said Thursday. Local car manufacturers can adjust more easily to a strong exchange rate if it remains stable. But Anfavea frets about the relentless gains spurring imports.

  "What worries isn't the number, but the trend," Bellini said. "We have a trade deficit of $3.8 billion in the auto industry through August and we're projecting it will reach $5 billion by the end of this year," he said. "There's no ideal number of exports or imports but a point of equilibrium between exports and imports would be to zero that deficit."

According to Win Thin of Brown Brothers Harriman in New York, Brazil's government has a "justified concern" about the strong real, as its real effective exchange rate--weighted against a basket of currencies and adjusted for inflation--is up "an astounding 40% since January 2007," Thin said.


BRAZIL'S BULLISH CAPITAL MARKET - PETROBRAS
Capital Market Volume Booms On Petrobras Offering

Brazilian capital market activity is booming, boosted by the world's largest-ever share offer in September by government-controlled energy giant Petrobras (PBR, PETR4.BR), according to a report Thursday by the Brazilian Association of Financial and Capital Market Institutions, or Anbima.

Total capital market activity for the first nine months of 2010 was 199.7 billion Brazilian reals ($119 billion). A big chunk of 2010 operations-to-date, BRL120.4 billion, came from September's Petrobras share offer.

The nine-month figure for capital market activity was already nearly double the entire 2009 calendar year total of BRL107.2 billion.

Capital market operations are up this year as Brazilian companies mount an energetic recovery from the 2009 recession. Investors, including foreign funds, have been eager buyers of Brazilian shares, debentures and overseas bonds, according to Anbima.

Total share offers for the first nine months of the year were BRL144.7 billion, more than triple the number in the same period a year ago. Even without Petrobras, share offer volume is up 10.9% from the first nine months of 2009, Anbima said.

Total debentures issues on the domestic market for the first nine months of the year were BRL30.5 billion, up 84% from the same period a year ago.

Overseas bond issues by Brazilian companies reached $26.7 billion, 2 1/2 times the number in the first nine months of 2009. Anbima noted that Brazilian companies have been raising more money at lower interest rates. The average rate obtained so far this year on overseas bonds was 7%, down from 8.2% for the same period a year ago.

Brazil's economy is likely to expand by at least 7% this year, according to both government and private economists.


CHILE:

Chile Stocks Down 1.2%, Approach 4,700 Points
Chile's blue-chip Ipsa index fell 1.2% late Thursday, fast approaching 4,700 points, as investors continued to book profits.

The Ipsa recently fell to 4,700.37 points, while market volume totaled 64.0 billion Chilean pesos ($134.7 million). Volume totaled CLP124.45 billion the previous session.

Among decliners, technology firm Sonda (SONDA.SN), which recently surged on robust expansion plans and brokerages' recommendations, fell 4.2% to CLP1,105.20; Banco Santander Chile (SAN, BSANTANDE.SN), the nation's largest bank in terms of loans, dropped 2.4% to CLP43.90; and fuel and forestry conglomerate Copec (COPEC.SN), the Ipsa's heaviest-weighted share, lost 2.1% to CLP8,780.00.


MEXICO:
Mexico's Stocks Close Lower In Mixed Trade; IPC -0.3%

Mexican stocks Thursday gave back some of the gains they had made while setting record-high closes in the previous two sessions.

The IPC index of leading issues finished down 0.3% at 34,258 on volume of 157.3 million shares worth 4.89 billion pesos ($389 million), pulling back from its record high close of 34,371 Wednesday. The direction of individual issues was mixed, with 19 out of 35 of the IPC's components ending the session lower.

Among Mexican decliners, retailer Wal-Mart de Mexico's (WALMEX.MX) V shares lost 2.2% to MXN31.47 after the company reported below-estimate same-store sales growth for September. Walmex said Wednesday that its comparable sales were up 2.3% from September of 2009, against expectations of close to 3%.

"Average ticket is showing only moderate signs of improvement [increasing 1% year-on-year], and traffic figures are decelerating relative to previous quarters," Credit Suisse said in a report. "We believe these results should be seen as slightly negative for the shares, and we recommend investors to stay in the sidelines ahead of 3Q10 results." Walmex plans to report its third-quarter results on Monday.

Lourdes Rocha, an analyst with Banamex, was a little more forgiving in her assessment of Walmex's September results. "Although total sales advanced at a nominal rate similar to the previous month and above inflation, they show a deceleration compared with the period between May and July, when growth was in the double-digits, which leads us to deduce that consumption continues to advance, albeit at a more moderate pace," Rocha said.

Among Mexican blue chips, global cement maker Cemex's (CX) CPOs dipped 1.6% to MXN10.42 and wireless carrier America Movil's (AMX) V shares ended down 1% to MXN34.29.

America Movil, through its Brazilian unit Embratel Participacoes SA (EBTP4.BR), bought 143.85 million preferred shares Thursday of Brazilian cable television company Net Servicos SA (NETC4.BR) for BRL3.3 billion ($2 billion). Embratel bought the shares as planned at BRL23 apiece. It had offered to buy all of Net's outstanding shares, which would have cost some BRL4.6 billion.

Embratel currently owns about 35% of Net's total capital, including preferred and voting stock.

The acquisition is part of America Movil's plans to provide full telecommunications services in the Brazilian market, alongside Embratel's long distance and corporate services, and mobile telephone operator Claro.

Among Mexican gainers Thursday, airport operator OMA's (OMA.MX) B shares advanced 0.7% to MXN24.00 after the company reported that passenger traffic at the 13 airports it operates rose 2.7% in September from a year earlier. "Even though OMA has the weakest growth in the sector, the share is trading at a premium. We don't think this trend is sustainable," Banamex analysts wrote Thursday.

The Bank of Mexico reported inflation for September, which once again came in below economists' expectations, further cementing views that the central bank won't be raising interest rates until the second half of 2011.

The consumer price index rose 0.52%, mostly on higher food and education costs. The annual inflation rate edged up to 3.7% from 3.68% at the end of August. The peso weakened against the U.S. dollar Thursday to MXN12.5575.



European Markets:
The European Central Bank leaves all of its main interest rates unchanged at its governing council's monthly policy-setting meeting, for the 17th month in succession.


EURO TOUCHES $1.40
The euro has benefited from the dollar's weakness and hit an eight-month high of $1.3949 overnight. It was testing those highs, changing hands at $1.3940.

In Europe, the FTSE 100 index of leading British shares closed down 19.26 points, or 0.3 percent, at 5,662.13 while France's CAC-40 rose 5.56 points, or 0.2 percent, to 3,770.47. Germany's DAX ended 5.52 points, or 0.1 percent, higher at 6,276.25. Dublin Stocks: ISEQ Ending -0.7% At 2,720; AIB -8.4%

European shares edged lower in early trade, giving up a little of the previous two sessions' gains, and ahead of interest rate decisions and policy indications from the Bank of England and European Central Bank. The FTSEurofirst 300 (^FTEU3 - News) index of top European shares was down 0.3 percent.

Meetings of the European Central Bank and Bank of England on Thursday will be watched for any hint that, like the Federal Reserve and Bank of Japan, policymakers are warming up to using newly printed money to buy assets.

UK HOME PRICES FALL
UK house prices fell 3.6% in September

The 3.6% drop was the biggest fall in month-on-month prices since the figures were first compiled in 1983.

Low transaction levels in the housing market meant that there was volatility in the month-on-month measure of house prices, Halifax's housing economist Martin Ellis said.


House prices fell by 3.6% in September from the previous month, according to the Halifax the largest fall on record.  The bank said it was too early to conclude that this was the start of a sustained fall in prices. An increased number of properties available for sale in recent months had pushed down prices.

The three-month on three-month comparison, seen as a smoother measure of prices showed a 0.9% drop in September.

The average UK home is now valued at £162,096, the survey found. Prices remained 2.6% higher than a year ago, the figures show, although this was down from a 4.6% rise reported in August.

It also brings it close to the 3.1% annual change reported recently in the house price index from the Nationwide Building Society.


FRANCE:
NATIONAL STRIKE
Strike Blocking 51 Ships from Unloading

France's industrial disputes in France were spreading, with the strike at Marseille's Fos-Lavera oil terminal, the world's third largest, in its 11th day, blocking 51 ships from unloading their cargoes.

The access road to the oil depot at the oil terminal was blocked by local refinery and port workers, preventing trucks from loading oil, a local CGT union representative told Dow Jones Newswires.
Workers at Lavera's Ineos refinery walked out. "The French port strike is still affecting us," said analyst Carl Larry of Oil Outlooks and Opinions. "It's going to remain an issue...It's going to delay a lot of refinery production out that way."


IRELAND:
Finance Minister Brian Lenihan has no plans to change the position on senior debt at Irish financial institutions and won't impose losses on senior debt, the National Treasury Management Agency says.




Asian Pacific Markets:
Asian stocks steadied on Thursday after hitting a two-year high, capped by weakness in the technology sector, while the dollar fell ahead of a U.S. payrolls report due on Friday.

The dollar was trading at 82.80 yen, not far from the 15-year low of 82.75 yen plumbed on Wednesday.
Japan's Nikkei share average slipped 0.1 percent, but was still up around 3 percent on the week. After Tuesday's unexpected rate cut by the Bank of Japan, the index is outperforming the U.S. S&P 500 index (^SPX - News) and the FTSEurofirst 300 index, which are both up 1.2 percent so far this week.

"The BOJ's easing lifted share prices, but now investors are focusing on the U.S. jobs data to determine the Fed's next action," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

The MSCI index of Asia Pacific stocks outside Japan was up 0.28 percent to the highest since June 2008.

The 11.6 percent rise in the index last month exceeded the all-country world index by two percentage points and has been driven by the consumer discretionary, energy, industrial and materials sectors.

The technology sector was under pressure on Thursday after Samsung Electronics Co, the world's largest memory chip maker, guided the market's earnings expectations for the firm lower. Samsung shares fell 2.4 percent and the region's tech sector slipped 0.6 percent on fears the company's outlook was foreboding ahead of results due next week from Intel (NasdaqGS:INTC) and Advanced Micro Devices (NYSE:AMD).



FOREX WORLD CURRENCIES SNAPSHOT:
(THURSDAY, OCT 7, 2010-4:00 PM)

EUR/USD     1.3929     +0.0007 (0.05%)
USD/JPY     82.3400 -0.6600 (-0.80%)
GBP/USD     1.5877     +0.0014 (0.09%)
CAD/USD     0.9819     -0.0069 (-0.70%)
USD/HKD     7.7552     0.0000 (0.00%)
USD/CNY     6.6903     +0.0010 (0.01%)
AUD/USD     0.9812     +0.0048 (0.49%)


World Markets Snapshot:
 (THURSDAY, OCT 7, 2010 4:00 PM)

Shanghai     2,655.66     +44.98 (1.72%)
Nikkei 225     9,684.81     -6.62 (-0.07%)
Hang Seng Index     22,884.32     +3.91 (0.02%)
TSEC     8,283.92     -0.11 (0.00%)
FTSE 100     5,662.13     -19.26 (-0.34%)
DJ EURO STOXX 50     2,786.88     +6.88 (0.25%)
CAC 40     3,770.47     +5.56 (0.15%)
S&P TSX     12,445.93     -55.79 (-0.45%)
S&P/ASX 200     4,691.30     +4.50 (0.10%)
BSE Sensex     20,315.32     -227.76 (-1.11%)

Thursday 's US Economic Calendar:

12:30 p.m.
Oct 2 Unemployment Insurance Weekly Claims Report - Initial Claims: Weekly Jobless Claims (previous 455K); Weekly Jobless Claims Net Change (previous +2K); Cont Jobless Claims (prior week) (previous 4457000); Cont Jobless Claims Net Chg (prior week) (previous -83K)

2:00 p.m.
Sep 25 DJ-BTMU U.S. Business Barometer: DJ-BTMU Business Barometer (previous -0.3%); DJ-BTMU Business Barometer (52 Wk) (previous +4.7%);

2:30 p.m.
Oct 1 EIA Natural Gas Storage Report: Total Working Gas in Storage (previous 3414B); Total Working Gas in Storage (Net Change) (previous +74B)

5:00 p.m.
Federal Reserve Bank of Dallas President Richard Fisher speech in Minneapolis

5:30 p.m.
Federal Reserve Bank of Kansas City President Thomas Hoenig speech

7:00 p.m.
Aug Consumer Credit Monthly Net Change (previous -3B)

8:30 p.m.
Money Stock Measures

8:30 p.m.
Oct 6 Foreign Central Bank Holdings: Foreign US Debt Holdings (previous 3.24T); US Foreign Agency Holdings (previous 752.54B); Foreign Treasury Holdings (previous 2.49T)

8:30 p.m.
Oct 6 Federal Discount Window Borrowings: Primary Credit Borrowings (previous 99M); Primary Credit Borrowings W/E Daily Avg (previous 25M); Discount Window Borrowings (previous 49.77B); Discount Window Borrowings W/E Daily Avg (previous 50.63B)

Reports:
G20 Finance and Central Bank Deputies Meeting
Sep Chain-Store Sales

Market Summary, Wednesday, Oct. 6, 2010:

Stocks:
Stocks finished mixed, with a gain for the Dow Jones Industrial Average and a loss for the Nasdaq, as investors awaited further signals on the labor market from the government Friday. Paul Brigandi, senior vice president of trading at Direxion Funds, said that while trading volumes were low, he was impressed that stocks were able to hang onto Tuesday's 193-point gain on the Dow.

Treasuries:
U.S. Treasurys and government bonds in Germany and the U.K. posted a strong rally, fueled by rising speculation of more monetary stimulus from leading central banks to bolster economic growth. The buying binge pushed down bond yields broadly, with the two-year and five-year Treasury yields hitting record lows. The benchmark 10-year Treasury yield touched its lowest level since January 2009.

Forex:
The dollar fell broadly as a fresh round of weak U.S. jobs data added weight to the argument that the Federal Reserve will soon act to jolt a sagging economy. The ICE Dollar Index, which tracks the U.S. currency against a trade-weighted basket of currencies, traded at its lowest level since January, while the euro, which makes up the bulk of the index, soared above $1.39, moving to its highest level against the dollar since February.





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