US & World Daily Markets Financial Briefing 03-06-2009

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Stocks Seeing Notable Weakness On Disappointing Data

Stocks are showing notable weakness in mid-morning trading on Wednesday, partly offsetting the gains posted in recent sessions. The major averages opened lower and are all in negative territory as traders react to largely disappointing economic data.

Service sector activity contracted at a slightly slower rate in the month of May, according to a report released by the Institute for Supply Management, although the index of activity in the sector increased by less than economists had expected.

The ISM said its index of activity in the service sector rose to 44.0 in May from 43.7 in April, although a reading below 50 indicates a continued contraction in the sector. Economists had been expecting a somewhat more notable increase to a reading of 45.0.

While the Commerce Department released a separate report showing a notable increase in factory orders in the month of April, the increase came after a substantial decline in the previous month and came in slightly below economist estimates.

The report showed that orders for manufactured goods rose 0.7 percent in April following a revised 1.9 percent drop in March. Economists had expected orders to increase by 0.9 percent compared to the 0.9 percent decrease originally reported for the previous month.

Additionally, private sector employment experienced another notable decline in the month of May, according to a report released by Automatic Data Processing, Inc. (ADP), with the decrease in jobs slightly exceeding economist estimates.

ADP said non-farm private employment fell by 532,000 jobs in May following a revised decrease of 545,000 jobs in April. Economists had expected a decrease of about 525,000 jobs compared to the decline of 491,000 jobs originally reported for the previous month.

Traders are also digesting comments from Federal Reserve Chairman Ben Bernanke, who is testifying before the House Budget Committee on the current state of the economy.

In other news, the New York arm of the Fed is purchasing treasuries set to mature between May of 2016 and May of 2019. The results of the buyback are set to be revealed at 11:00 a.m. ET.

On the corporate front, NetApp (NTAP) said it has made a revised proposal to acquire Data Domain (DDUP). As per the terms of the proposal, NetApp will acquire all outstanding shares of Data Domain common stock for $30 per share in cash and stock in a transaction valued at approximately $1.9 billion.

Shares of Data Domain are currently up by 2.9 percent on the day after reaching their best intraday level in over 18 months earlier in the session.

Meanwhile, Toll Brothers (TOL) reported a second quarter net loss of $83.17 million or $0.52 per share, compared to a net loss of $93.74 million or $0.59 per share last year. Excluding write-downs, the loss was $5.2 million, or $0.03 per share. Wall Street analysts expected a loss of $0.44 per share.

The major averages have moved roughly sideways in recent trading, stuck firmly in negative territory. The Dow is currently down 95.02 at 8,645.85, the Nasdaq is down 16.37 at 1,820.43 and the S&P 500 is down 13.77 at 930.97.

Sector News

The major sectors are firmly treading in negative territory on the day, helping to drag down the major averages in mid-morning dealing.

Some of the day’s worst performances are being turned in by steel stocks, as reflected by the 5.7 percent pullback being shown by the Amex Steel Index. With the retreat, the index is pulling back well off an eight month high set in the previous session.

Further weakness has emerged among oil service and gold stocks, with the Philadelphia Oil Service Index and the Amex Gold Bugs Index slipping by 5.1 percent and 3.9 percent, respectively. The retreat comes as crude oil has dropped nearly $1 a barrel and gold is down by $7.70 an ounce.

Significant weakness is also present in the housing, semiconductor, and healthcare sectors. The losses by housing stocks may be partly due to the release of a report showing a notable decline in mortgage applications last week.

Meanwhile, biotechnology stocks are among the few gainers on the day, with the Amex Biotechnology Index up by 1.9 percent on the day.

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Toronto stocks could head to the downside on Wednesday morning in early trading as European stocks are down and U.S. futures are pointing lower. A drop in oil prices could hinder energy stocks.

Crude oil prices are down for a second straight session, moving further off a multi-month low. Light sweet crude for July is down $1.01 to $67.54 per barrel in electronic trading as investors await the Energy Department's inventory data later this morning.

In early metal trading, copper prices are down 2 cents to $2.2775 and gold is down $7.90 to $976.50. Bombardier reported that its first quarter net income was US$158 million, compared to US$229 million for the same period last year. Earnings per share were US$0.09, compared to US$0.12 last fiscal year.

Agrium announced that its offer to acquire all of the outstanding shares of CF Industries Holdings Inc. for US$40.00 in cash and one common share of Agrium for each CF share is its final price absent engagement by CF and demonstration of additional value.
 
Eldorado Gold announced that it has agreed to acquire 57.9 million shares of Sino Gold Mining Ltd from Gold Fields Ltd in a private transaction in exchange for Eldorado shares.

Meanwhile, the Globe and Mail reported Toronto Dominion is looking into the possibility a group of traders improperly passed rumors on to traders regarding Opti Canada.

Automatic Data Processing said non-farm private employment fell by 532,000 jobs in May following a revised decrease of 545,000 jobs in April. Economists had expected a decrease of about 525,000 jobs compared to the decline of 491,000 jobs originally reported for the previous month.

Industry data released on Wednesday showed that mortgage application volume tumbled over 16% last week, including an adjustment for the Memorial Day holiday. On an unadjusted basis, the Index plunged 32.5%.

On Tuesday, the S&P/TSX Composite Index fell 15.27 points or 0.14% to settle at 10,588.79. The index had gained in five of the previous seven sessions to reach a eight-month high.

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Markets across the Asia-Pacific region ended in positive territory on Wednesday amid cautious trading despite increasing optimism about the global recovery. After opening higher on positive Wall Street cues, most markets pared their early gains but still ended higher.

Japan’s Nikkei 225 Average opened at 9,724 compared to its previous close at 9,704, mirroring the gains on Wall Street. The index treaded in a narrow range between 9,718 and 9,774 amid alternate bouts of buying and selling before finally closing at 9,742, representing a gain of 37.36 points, or 0.38%. The broader Topix Index of all first section issues edged up 0.94 points, or 0.10% to close at 915.

Asahi Glass gained more than 5% and Nippon Electric Glass gained more than 8% after JP Morgan Chase raised the rating for glassmakers to "overweight" on expectations of higher sales following a recovery in demand for flat-screen materials.

Chemical stocks advanced on expectations that possible mergers in the industry might result in higher profits. Mitsui Chemicals added 1.70%, Mitsubishi Chemical Holdings gained 0.90% and Tosoh Corp rose 0.96%.

Automakers also advanced, with Honda Motor gaining 1.95% and Toyota Motor adding 1.30%. However, Nissan Motor remained unchanged from the previous close. Financial stocks ended in negative territory following losses by their peers on Wall Street. Mitsubishi UFJ lost 1.13%, Mizuho Financial slipped 1.26%, Resona Holdings shed 0.83% and Sumitomo Mitsui edged down 0.27%.

The All Ordinaries Index opened unchanged from its previous close at 3,948 and briefly slipped into negative territory before recovering and moving above the unchanged line. A positive GDP report lifted market sentiment and the index surged past the psychological 4,000-mark, led by property, resource and bank stocks. The index ended the trading session at the day's high at 4,009, up 61.20 points, or 1.55%. The benchmark S&P/ASX 200 Index followed a similar trend and ended up at 4,017, representing a gain of 61.90 points, or 1.56%.

On the economic front, the Australian Bureau of Statistics revealed that the country averted a technical recession, as gross domestic product unexpectedly rose a seasonally adjusted 0.4% in the first quarter of 2009 compared to the previous quarter. That was significantly higher than the 0.2% quarterly contraction that analysts had been expecting after the revised 0.6% decline in the previous three months.

A separate report from the Australian Industry Group and Commonwealth Bank revealed that services sector activity contracted for the 14th consecutive month in May, although the pace slowed from that recorded in the first quarter. While the Performance of Services Index rose 0.1 points from April to 39.9, the sales index fell to 39.1 from 39.9, and the capacity utilization decreased to 72.2% from 75.8%.

Property, resource and bank stocks were the major gainers. In the property space, Mirvac Group soared 9.02%, Lend Lease gained 6.25% and Westfield Group rose 6.10%. GPT Group was in the spotlight , gaining 12.50% after the company announced the sale of assets equivalent to A$560 million to restructure its core business model.

Resource stocks also advanced on increasing hopes of a recovery in demand. BHP Billiton gained 0.90%, Iluka Resources rose 3.37%, and Rio Tinto advanced 3.77%. Among gold stocks, Sino Gold edged up 0.46% and Newcrest Mining gained 1.50%. However Lihir Gold bucked the trend and shed 0.20%.

Banking stocks also ended higher on the positive GDP data for first quarter. ANZ Bank gained 2.38%, Commonwealth Bank added 1.29%, National Australia Bank rose 1.36% and Westpac Banking advanced 2.19%.

In Hong Kong, the Hang Seng Index opened sharply higher at 18,617 compared to its previous close at 18,389, and continued to surge ahead, led by property stocks. The index closed off the highs at 18,576, up 187.39 points, or 1.02%.

PetroChina added 1.88% and CNOOC, the largest offshore oil firm in China, edged up 0.37%. Aluminum Corp. of China, or CHALCO, surged 5.32% on expectations of higher demand. China-related stocks ended mixed on profit taking. China Mercantile Holdings gained 3.07%, but China Resources slipped 0.11% and China Shenhua lost 0.74%.

In South Korea, the benchmark KOSPI Index ended in positive territory, led by shipbuilding and technology stocks. The benchmark KOSPI Index ended the session with a gain of 2.04 points or 0.14% at 1,415.

Shipping related stocks advanced after the Baltic Dry Index advanced. Hyundai Heavy Industries climbed 4.16% and Daewoo Shipbuilding & Marine Engineering, the world's third-largest shipbuilder, advanced 2.92%. Technology related stocks also ended higher. Chip giant Hynix Semiconductor jumped 5.12% and flat panel leader LG Display advanced 1.57%.

Financial stocks ended weak following U.S. market cues. KB Financial, which controls Kookmin Bank, declined 1.51%, Shinhan Financial lost 1.57% and Woori Finance shed 5.70%.

India’s Sensex ended in negative territory amid volatile trading as investors preferred to take profits after the market gained nearly 80% from the year's low in the past few sessions. The BSE Sensex ended at 14,871, representing a loss of 4.01 points, or 0.03%, while the broader Nifty gained 5.45 points or 0.12% to close at 4531.

Among the other major markets in the region, China's Shanghai Composite Index added 54.29 points, or 1.99% to close at 2,779, Indonesia's Jakarta Composite Index ended at 2,010, representing a gain of 12.27 points, or 0.61%, and Strait Times Index in Singapore gained 8.00 points or 0.34% to close at 2,384. However, the Taiwan Weighted Index edged down 55.94 points, or 0.80% to close at 6,893.

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The major European markets are trading lower on Wednesday, extending the lackluster sentiment witnessed yesterday. The French CAC 40 Index is receding 1.58% compared to a 0.73% decline by the German DAX Index, while the U.K.’s FTSE 100 is Index is pulling back 1.93%. Financial and commodities are weighing on the markets.

On the economic front, the U.K. Nationwide Building Society said its consumer confidence indicator climbed to a 6-month high of 53 in May from 51 in April, the highest since November 2008. Meanwhile, economists had forecast a reading of 52.

The euro zone economy contracted 2.5% in the first quarter from the fourth quarter, a report released by Eurostat showed. This was the largest decline since 1995 and matched the initial estimate released on May 15. The decline in the fourth quarter was 1.8%. The contraction, which started in the second quarter of 2008, indicates deep recession.Year-on-year, gross domestic product was down by a revised 4.8%, bigger than the 1.7% drop seen in the fourth quarter. According to flash estimate, the economy had declined only 4.6% in the first quarter.

U.S. Economic Reports

The ADP National Employment report, which sheds light on non-farm private employment, showed that job losses in the private sector were 532,000 in May. Economists expected the report to show a loss of 525,000 jobs for the month.

The employment numbers from March to April was revised down to show a decline of 545,000 jobs from a drop of 491,000 estimated earlier. In May, non-farm private employment in the service providing sector declined by 265,000 compared to the 267,000 jobs lost in the goods-producing sector. Specifically, employment in the manufacturing sector dropped 149,000 jobs.

The Commerce Department is due to release its report on factory goods orders for April at 10 AM ET. Orders for manufactured goods are likely to have increased 0.9% in the month.

Factory goods orders for March showed that orders dipped 0.2% and shipments were down 1.2%. Unfilled orders and inventories also declining, dropping 1.5% and 0.8%, respectively. Meanwhile, durable goods orders, which make up the bulk of factory goods orders, saw a bigger-than-expected 1.9% advance in April, a report released by the Commerce Department showed this week.

The month-ago reading was revised down to show a 2.1% decline from the 0.8% drop initially estimated. Shipments of non-defense capital goods orders, excluding aircrafts, were down 1.5% in April, suggesting that investment in machinery and equipment will subtract from GDP growth.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET. The non-manufacturing index is likely to show a reading of 45 for May.

The services sector's purchasing managers' index rose 2.9 points to 43.7 in April. The business activity index rose 1.1 points to 45.2 compared to an 8.2 point-increase in the new orders index to 47. The index of backlog of orders rose 3 points to 44, while new export orders index climbed 9.5 points to 48.5. Imports staged a solid rebound, with the corresponding index surging up 11.5 points to 48.5.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.

Crude oil stockpiles fell by 5.4 million barrels in the week ended May 22nd to 363.1 million barrels. Notwithstanding the decline, inventories were still above the upper boundary of the average range.

Distillate inventories edged up by 0.3 million barrels and were above the upper bound of the average range for this time of the year. However, gasoline stockpiles fell by 0.6 million barrels and were below the lower limit of the average range. Refinery capacity utilization averaged 84% in the four weeks ended May 22nd compared to 83.4% in the previous week.

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Arrow Electronics may see weakness after it lowered its revenue guidance for the second quarter to $3.05 billion-$3.65 billion from $3.15 billion-$3.75 billion. The company estimates earnings of 26-31 cents per share compared to its earlier guidance of 26-38 cents per share. The company attributed the toned down expectations to the ongoing macroeconomic crisis in its European components business.

Tessera Technologies  is likely to gain ground after it said it has signed a pre-negotiated license agreement with Motorola, settling all outstanding litigation between the companies and providing for Tessera to receive some royalties on shipments of certain electronic products that has unlicensed chips using the company’s patented TCC technology. Based on this, the company revised up its second quarter revenue guidance to between $59 million and $61 million compared to the consensus estimate of $47.83 million.

PMI Group is also likely to move to the upside after it said S&P has upgraded the company by 2 notches to B- and also removed it from CreditWatch developing with the outlook stable. The rating agency attributed the change to a reduction in the potential for covenant default in the wake of the amended and restated credit agreement the company has negotiated.

Bob Evans may see buying interest after it earnings rose to 69 cents per share from 52 cents per share last year. The company’s net sales were down 1.2% to $431 million. Analysts, on average, estimate earnings of 39 cents per share on revenues of $430.79 million.

JoS. A. Bank could be in focus after it reported that its first quarter earnings rose to 62 cents per share from 53 cents per share last year. Sales rose 11.4% to $161.9 million. The consensus estimates called for earnings of 58 cents per share on revenues of $159 million.

Shanda Interactive Entertainment is expected to trade higher after it reported that its first quarter net revenues rose 42% to $162 million. The company’s earnings per share rose to 5.48 Chinese yuan or 80 cents per share from 4.14 Chinese yuan in the year-ago period. The Street estimated earnings of 74 cents per share on revenues of $155.66 million.

FirstEnergy may move to the upside after it said it expects 2009 non-GAAP earnings guidance in the range of $3.70 to $3.85 per share. Analysts estimate earnings of $3.82 per share.

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