US & World Daily Markets Financial Briefing 03-08-2009

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Stocks Seeing Strength On Heels Of Manufacturing, Construction Data

After threatening to surrender early gains, stocks were boosted by better-than-expected data on manufacturing and construction spending in mid-morning trading on Monday. The major averages are all in positive territory by considerable margins, looking to build on last week’s gains.

While the Institute for Supply Management released a report showing a continued contraction in manufacturing activity in July, the report also showed notable improvement in new orders and production.

The ISM said its index of activity in the manufacturing sector rose to 48.9 in July from 44.8 in June, although a reading below 50 indicates a contraction. Economists had been expecting a more modest increase to a reading of 46.5.

Separately, the U.S. Commerce Department revealed that construction spending rose 0.3 percent in June following a revised 0.8 percent slide in May. The figure surprised economists, who had expected a decline of 0.5 percent for the month.

The report also revealed that private construction slipped 0.1 percent, though residential construction spending was up 0.5 percent. The report also showed that public construction spending was up 1.0 percent.

With earnings season coming to a close, Humana (HUM) reported second-quarter net income of $1.67 per share, compared to $1.24 per share in the same quarter of last year. Wall Street analysts expected the company to report earnings of $1.64 per share for the quarter.

Humana's total revenues for the quarter rose to $7.90 billion from $7.35 billion in the prior year quarter. Twelve analysts had a consensus revenue estimate of $7.77 billion for the quarter.

Tyson Foods (TSN) reported third-quarter net income of $0.35 per share compared to $0.03 per share in the year ago quarter. Sales for the quarter totaled $6.66 billion, compared to $6.85 billion in the prior year quarter. Analysts had expected the company to report earnings of $0.22 per share on revenues of $6.68 billion.

After the closing bell, homebuilding stalwarts Centex (CTX) and Pulte Homes (PHM) are set to report their quarterly results.

In other news, the U.S. House voted overwhelmingly Friday to add another $2 billion in federal funds for the popular "cash for clunkers" program. The program is up for review by the Senate this week.

The major averages are currently posting strong gains, not far off their best levels of the day. The Dow is currently up 106.26 at 9,277.87, the Nasdaq is up 19.27 at 1,997.77 and the S&P 500 is up 13.22 at 1,000.70.

Sector News

Resource stocks are turning in another strong performance, building on gains posted late last week. Steel stocks are seeing considerable strength, as reflected by the 5.4 percent gain being shown by the NYSE Arca Steel Index. With the climb, the index has reached its best level since mid-June.

The strength among resource stocks comes amid an increase in commodity price on the NYMEX, where oil has surged by $1.95 to $71.40 per barrel and gold has jumped by $3.89 to $957.50 per ounce.

Healthcare provider and transportation stocks are also moving notably higher, with the Morgan Stanley Healthcare Provider Index and the Dow Jones Transportation Index up by 2.9 percent and 2 percent, respectively.

The healthcare provider index has reached its highest level in over ten months, while the transportation index is at a seven-month high.

While electronic storage and housing stocks are also showing strong moves to the upside, health insurance stocks are bucking the day’s uptrend, with the Morgan Stanley Healthcare Payor Index down by 1 percent. The index is continuing its retreat away from the nearly ten-month closing high set last week.

Stocks Driven By Analyst Comments

Shares of specialty retailer J. Crew are gaining in mid-morning trading after being upgraded by Brean Murray from Hold to Buy. The stock is up by 3.5 percent, rising to its best level in eleven months.

Education Realty Trust is also on the rise following an upgrade by KeyBanc Capital Markets from Hold to Buy. Shares of the real estate investment trust are posting a gain of 4.1 percent, rising to their highest price in roughly seven weeks.

Meanwhile, Burger King is under pressure after JP Morgan Chase downgraded the stock from Overweight to Neutral while also lowering its target price from $21 to $19. The stock is down by 2.2 percent, pulling back off the three-week high set in the previous session.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region finished Monday's trading mostly higher, with Hong Kong's Hang Seng Index posting a gain of 1.1 percent. Japan's benchmark Nikkei 225 Index bucked the uptrend, however, ending the day slightly lower.

The major European markets are also moving higher, with the French CAC 40 Index and the German DAX Index up by 2 percent and 1.9 percent, respectively, while the U.K.'s FTSE 100 Index is posting a gain of 1.7 percent.

In the bond markets, treasuries are seeing notable losses following the day’s manufacturing and construction data. Subsequently, the yield on the benchmark ten-year note is trading at 3.624 percent, posting a gain of 12.3 basis points.

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Crude oil futures are currently rising $1.45 to $70.90 a barrel after the commodity went about a roller coaster in the week ended July 31st, when it rose $1.40 or 2.01% to $69.45.

Last Monday, oil rose modestly, only to retreat by over $1-a-barrel on Tuesday, as the commodity receded in line with the lackluster performance of the equity markets. Oil fell by close to $4-a-barrel on Wednesday, as the weekly inventory report revealed a build up in crude oil stockpiles.

The commodity bounced back on Thursday, rising by almost as much as it had lost in the previous session, as stronger demand from refiners led to the thinking that overall demand may perk up. On Friday, oil rose again, as the U.S. dollar weakened, sending the black gold up by about $2.50-a-dollar.

Gold futures are currently rising $1 to $956.80 an ounce. In the previous week, the precious metal rose $5.20 or 0.1% to $961 an ounce.

Among the currencies, the dollar declined against most of its major counterparts n the week ended July 31st. The currency considered as a safe haven came under pressure on strengthening hopes that a recovery may be close at hand. The greenback lost 0.3% against the euro to $1.4259 a euro, but it was little changed against the yen at 94.64 yen.

Currently, the dollar is trading at 95.005 yen and is valued at $1.4311 versus the euro.

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Most markets in Asia closed higher, with the exception of the Japanese and Taiwanese markets. Japan’s Nikkei 225 average opened modestly lower and showed some degree of volatility throughout the session before closing down 4.36 points or 0.04% at 10,353, snapping a 3-session running streak.

Most technology exporters receded along with the weaker yen. On the other hand, auto stocks rallied strongly on the prospects of seeing strong monthly sales. Tire makers, financial and shipbuilding stocks also showed some strength. Steel stocks were mixed.

On the economic front, total cash earnings of wage earners in Japan dropped at a faster pace in June, marking the biggest yearly fall on record, a report by the Ministry of Health, Labor and Welfare showed. Total cash earnings of workers in establishments with five or more employees dropped 7.1% year-on-year in June, faster than the revised 2.5% fall in the preceding month, and marked the 13th consecutive month of decline.

Australia’s All Ordinaries opened slightly higher and showed some volatility in early trading. Thereafter, then index advanced steadily before giving back some gains in late trading to close up 21 points or 0.49% at 4,271.

Financial stocks rose sharply, while some material stocks also showed some strength. The four major banks rose and among miners, BHB Billiton rose, but Rio Tinto fell.

Hong Kong’s Hang Seng shrugged off some early weakness and advanced, remaining above the unchanged line throughout the rest of the session. The index closed up 233.93 points or 1.14% at 20,807.

Index heavyweight HSBC Holdings rose 0.78% ahead of the release of its results, whole the rest of the financial stocks were also mostly higher. China-related stocks also advanced, while utility stocks saw some degree of weakness.

Indian Market Hits Fresh 52-week High

Rising sharply for the second straight session, the Indian market closed at a fresh 52-week high on Monday, boosted by strong global cues and consistent buying by foreign funds. Auto stocks led the market higher after reporting robust sales in July, followed by realty, metal, power and oil/gas stocks. However, consumer durable and defensive FMCG stocks ended in the red on concerns about rural demand due to the slow progress of monsoon rains.

On the economic front, while official data showed that exports from India dropped for the ninth straight month in June to $12.8 billion from $17.73 billion in the same month last year, the Markit Purchasing Managers' Index (PMI), based on a survey of 500 companies, which measures manufacturing activity, held steady at 55.30 in July, from 55.34 in June, rising from a trough of 44.37 in December.

After trading range bound till mid-session, the BSE Sensex rose to a high of 15,963 before finishing at 15,924, up 254 points or 1.62% from its previous close. Likewise, the S&P CNX Nifty rose 75 points or 1.62% to 4,711, the broad-based BSE 500 index rose 1.64%, the small-cap index advanced 1.74% and the mid-cap index added 2.36%. On the BSE, gainers outnumbered losers by 1761 to 950 ,with 72 stocks closing unchanged.

Among the top gainers, Hindalco Industries soared nearly 8%, Mahindra & Mahindra jumped 6.88%, Reliance Communication climbed 5.17%, BHEL rallied 5.15%, Tata Steel advanced 4.52%, Tata Power rose 4.31%, Jaiprakash Associates gained 4.05% and Maruti Suzuki added 3.98%.
 
Sterlite, Reliance Industries, DLF, Tata Motors, ICICI Bank, Grasim Industries, SBI, Reliance Infrastructure and ACC were the other prominent gainers. On the other hand, Hindustan Unilever, ITC, HDFC Bank and HDFC ended in the red.

Hindustan Lever fell 2.25% after data from AC Nielsen revealed that the company has lost share in both volume and value terms in the oral care and hair care market to smaller players like Dabur and CavinKare.

JK Tyre ended almost unchanged amid reports that it held preliminary discussions with the Tamil Nadu government to set up a car radial facility near Chennai. Ambuja Cements slipped 0.32% after reporting a modest rise in cement production for July compared to the year-ago period.

IT stocks closed mostly higher amid reports that they are evincing interest for a Rs.2,500-crore HRMS (human resource management system) outsourcing contract from Indian Railways. TCS rose 0.84%, Infosys gained 0.58% and Wipro edged up 0.08%, but Mahindra Satyam ended down 1.15%.

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The major European markets are moving to the upside on Monday, with the French CAC 40 Index, the German DAX Index and the U.K.’s FTSE 100 Index rising 1.37%, 1.65% and 1.58%, respectively.

In corporate news, Barclays reported that net profits for the first half rose to 1.888 billion pounds compared to 1.718 billion pounds last year. Meanwhile, HSBC reported a profit of $3.35 billion for the first half.

German retail sales dropped 1.6% year-over-year in real terms in June compared with a 3.7% drop in May. Economists had estimated an increase of 0.9%. A year earlier, retail sales were down 4%. On a monthly basis, retail sales dropped a seasonally and calendar-adjusted 1.8% in June after falling 1.3% in May.

U.S. Economic Reports

The monthly non-farm payrolls report for July and the manufacturing and services sector survey reports of the ISM are the key reports that traders are likely to closely watch in the unfolding week. Additionally, the Commerce Department's construction spending report for June, the National Association of Realtors' pending home sales report for June, the Bureau of Economic Analysis' personal income and spending report for June and the customary weekly jobless claims and oil inventory reports may also be of interest to traders.

Some degree of attention is likely to be vested on the auto sales due to be reported by individual automakers after Ford (F) seem to have suggested that it may have experienced the first annual gain in 2 years in July, benefiting from the government's 'cash for clunkers' program. The treasury auction of 3-year and 10-year notes and 30-year bonds are the other prominent events in economic calendar of the unfolding week.

The ISM's manufacturing purchasing managers' index is expected to rise again in July, although it is unlikely to have crossed the cut-off mark of '50' that delineates expansion and contraction. The services sector survey may also show similar results. State Street expects the manufacturing and non-manufacturing purchasing managers' indexes to rise into the high 40s, with both expected to converge on 50 over the next few months.

With the cumulative job losses in the recent recession at about 6.5 million over an 18-month span, each of which saw declines, we can expect a moderation in the pace of job losses, which characterized the four months preceding June. That said, it is a certainty that the economy lost jobs again in July and the unemployment rate will tick up further.

The personal income and spending report is expected to show a payback from the previous month's gains built on the back of transfer payments from the American Recovery and Reinvestment Act. The rate of increases in wages and salaries is also likely to slow due to a drop in the number of hours worked. Although personal spending is likely to show modest growth, real consumer spending may show a drop.

Individual automakers will report their sales, comprising unit sales of domestically produced cars and light duty trucks on Monday.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 46.5 for July.

The index of manufacturing activity rose for the sixth straight month to 44.8 in June, up about 2 points from May. Economists had expected a reading of 44.6. The new orders index dipped 2 points to 49.2, dropping below the 50 mark once again, and the orders backlog index eased to 47.5. On the other hand, the production index rose 6.5 points to 52.5. On a positive note, the employment index climbed 6.4 points to 40.7.

The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.5% decline in spending for June.

In May, construction spending declined 0.9% month-over-month, with private construction spending and public construction spending dropping 1% and 0.6%, respectively. Among private residential construction, spending on single-family construction declined for the 39th consecutive month, dropping 4.5% compared to a 9.6% drop in multi-family construction spending. At the same time, private non-residential construction rose 0.5%.

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Savient Pharma is likely to see some weakness after it announced that it has received a complete response letter from the FDA suggesting that the BLA for its treatment for chronic gout in patients refractory to conventional theraphy cannot be approved at this time. The complete response letter pointed to deficiencies in chemistry, manufacturing and controls.

Jabil Circuit may react to its announcement that it has priced its offering of $321 million 7.75% senior unsecured notes due 2016. The company said the notes would be issued at a price of 96.143% of par resulting in a yield to maturity of 8.50%.

Oshkosh Corp. is likely to gain ground after it announced that it has received an additional $1.06 billion delivery order from the U.S. Army Tank-automotive and Armaments Command Life Cycle Management Command. The order is in addition to an initial $1.05 billion delivery order the company received for 2,244 M-ATVs on June 30th.

Bristol-Myers Squibb and AstraZeneca may be in focus after they announced that the U.S. FDA has approved ONGLYZA, which is indicated as an adjunct to diet and exercise to improve blood sugar control in adults for the treatment of type 2 diabetes.

CenterPoint Energy could also be in focus after it announced that it has reached a settlement agreement with the Public Utility Commission of Texas staff and the City of Houston with respect to the recovery of costs the company incurred to restore service following Hurricane Ike.

Earnings

Humana said its second quarter net income rose to $1.67 per share from $1.24 per share in the year-ago period, as revenues rose 8% to $7.9 billion. The consensus estimates called for earnings of $1.64 per share on revenues of $7.77 billion.

Tyson Foods’ third quarter earnings were 35 cents per share compared to 3 cents per share in the year-ago period. On a continuing basis, the company reported earnings of 33 cents per share compared to a loss of 3 cents per share in the year-ago period. However, sales fell 3% to $6.66 billion. Analysts estimated earnings of 22 cents per share on revenues of $6.68 billion.

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