December 1, 2009

Rising Comodity Prices

Following a topsy-turvy trading session to end November, the first trading session in December picked up momentum as investors were propped up by solid economic reports and rising commodity prices. The markets were also aided by a weakening Dollar that helped strengthen foreign demand for commodities.

On the economic front, the National Association of Realtors confirmed that pending home sales in October increased 3.7% from September to a reading of 114.1. The current reading marks the highest level since March 2006, as well as being 32% above last year’s totals. The sale of previously owned homes increased for the ninth consecutive month in October, as potential buyers were eager to sign before the November 30 expiration of the government’s tax credit for first-time buyers.

A report from the Commerce Dept. revealed that spending within the construction industry marginally increased in October, advancing by 0.04%. The slight increase in spending, which amounted to $401M during the month, pushed the seasonally adjusted rate to nearly $911B. Although the reading does not appear to be too convincing, the increase did mark the first time in six months that spending rose.

Peeking further inside the report, spending on residential construction surged 4.4%, the largest increase in home building since March 1998. Despite the increase, spending still remains more than 23% below last year’s levels. Spending on non-residential construction fell 2.5% in October, the seventh straight months of declines. Non-residential production remains more than 20% below levels from a year ago.

The U.S. manufacturing sector grew for the fourth straight month in November, as a report from the Institute for Supply Management announced that its index for factory activity posted a reading of 53.6. Despite the growth, the reading was still down from October’s reading of 55.7.Included in the reading, new manufacturing orders advanced to 60.3 in November from a reading of 58.5 in October.

In a light day of company earnings reports, one of the most recognizable, Staples Inc. (SPLS), revealed prior to the markets open that profits during the 3Q swelled year-over-year. The company benefited from increased sales growth from its catalog business along with higher European office supply sales.

For the recent period, Staples recorded a net profit of $269.4M, or $0.37 per share, in contrast to last year’s 3Q earnings of $156.7M, or $0.22 per share, an increase in net income of nearly 72%. Staples incurred integration and restructuring costs of $16M, which affected net earnings by $0.02 per share. In last year’s 3Q, the company had $132M related to those expenses as well as an additional $57M in one-time tax charges.

Sales during the quarter came in lower than the previous year’s tally, falling from $6.95B to $6.52B, a decrease in overall revenues of more than 6%. Sales in North America came in at $5.1B, while International sales were down 10% to $1.4B.

Analysts, on average, were looking for the largest U.S. office supply company to post a quarterly profit of $0.38 per share based on total revenues of $6.45B.

Staples' Chairman and CEO, Ron Sargent, remarked, "With North American Retail growing again, improving trends in our Catalog businesses, solid profitability in our European office products portfolio, and record free cash flow, we're increasingly optimistic about the future."

For the upcoming 4Q, Staples is looking to post a profit between $0.36 and $0.38, which is in the range of analysts’ earnings forecasts of $0.37 per share.

With the day’s trading concluded, shares of SPLS surged on the day, adding $1.12, or 4.8%, to end the first trading day in December at $24.44 per share. Over the past year, the stock has traded within a relatively narrow range, between $14.25 and $24.86 per share, with the high end established during the day’s session.

Also reporting earnings was Universal Technical Institute Inc. (UTI), a provider of technical education training in automotive, diesel, collision repair and refinishing, motorcycle, marine and personal watercraft technologies. The company announced before the opening bell that profits for the 4Q advanced over last year’s totals, as an increase in student enrollment, higher tuition fees and lower fee discounts contributed to higher profits.

For the quarter, UTI posted a net profit of $7.59M, or $0.32 per share, compared to the previous year’s 4Q earnings of $0.55M, or $0.02 per share. Revenues, meanwhile, came in above last year’s tally as well, climbing from $84.63M to $99.54M, an increase of nearly 18% year-over-year.

Analysts within the industry were looking for the automotive technical training services provider to post a quarterly profit of $0.19 per share on total revenues of $95.42M.

Kimberly McWaters, President and CEO, commented, “The positive momentum we have created throughout the year culminated in the fourth quarter with record level student enrollment of 18,800 students and a return to double-digit operating margins. This solid performance provides a great beginning for 2010 with 2,300 more students in school than a year ago. Increasing utilization rates and continued focus on cost management should drive meaningful improvement to the bottom line in 2010."

For fiscal 2009, UTI posted a net income of $11.73M, or $0.48 per share, versus 2008 results of $8.22M, or $0.32 per share, an increase in annual earnings of nearly 43%. Revenues advanced as well, climbing from $343.46M to $366.64M, a jump of nearly 7%.

By the sound of the closing bell on December 1, shares of Universal Technical Institute slipped nearly 3%, giving up $0.54 to end the day at $18.35 per share. During the past 52 weeks, the company’s stock price has ranged between $8.80 and $21.12 per share.

Marking its second straight day of gains, the price of crude advanced on Tuesday, as investors took heed of positive U.S. economic data along with the Dollar’s continued weakness. By the end of trading, the price for a barrel of light, sweet crude for January delivery added $1.09 to settle at $78.37 a barrel. The January contract jumped $1.23 to $77.28 on Monday.

In additional NYMEX trading, heating oil jumped $0.0301 to $2.0780, while gasoline added $0.0308 to $2.0423. Natural gas slipped $0.086 to $4.762 per 1,000 cubic feet.

Inside the currency markets, the U.S. Dollar resumed its downward plight, trading lower against nearly all major world currencies. Heading into the early evening hours, the 16-nation Euro advanced versus the greenback, buying $1.5087, up from last night’s price of $1.4993. The British pound increased in value against the Dollar as well, as the Sterling was priced at $1.6622, up from yesterday’s price of $1.6424.

In additional Forex trading, the greenback did manage to advance against the Japanese yen, buying 86.63, up from Monday’s price of 86.29. However, the Dollar dropped to 1.0465 Canadian dollars from 1.0623 Canadian dollars and slipped to 0.9989 Swiss francs from 1.0065 francs.

While the equity markets soared today, investors took their capital away from the safer, government-backed securities. With that, the bond markets all retreated by the close of trading, as the benchmark 10-year note was lower by 23/32 to 100 24/32, as its yield increased by 0.08% to 3.28%.

Additionally, the longer maturing 30-year note slipped as well, falling 1 12/32 to 101 22/32 as its yield increased from 4.19% to 4.27%. Lastly, the shorter 2-year note inched lower by 1/32 at 100 4/32, with its yield at 0.67%.

With the first session of December complete, all the major U.S. indices were trading well into the green, as the Dow Jones Industrial average was higher by 126.74 points, or 1.2%, to end the session at 10,471.58.

The S&P 500 index was up 13.23 points, or 1.2%, to finish at 1,108.86, while the tech-heavy NASDAQ composite index gained 31.21 points, or 1.5%, to conclude the session at 2,175.81.

2009 Better Trades Article

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BRIAN MULLIN