US & World Daily Markets Financial Briefing 10-08-2009

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Stocks Posting Modest Losses In Mid-Morning Trading

After moving lower at the opening bell, stocks are treading in negative territory in mid-morning trading on Monday, as traders are doing some profit taking following the recent run-up in equities. The major averages are all in negative territory, although only by modest margins.

The retreat comes amid a light day on the economic front as traders are looking forward to key economic reports later in the week, including data on retail sales, industrial production and weekly jobless claims.

In addition, the Federal Open Market Committee will make its interest rate announcement on Wednesday, with the key fed funds rate expected to remain unchanged amid a challenging economic environment.

In corporate news, Freddie Mac said late Friday that it no longer needs government help at this point, as the mortgage lender posted a positive net worth.

Benefiting from accounting adjustments and gains, Freddie Mac reported a second quarter profit of $821 million on a notable increase in revenues to $7.47 billion from last year's $1.59 billion.

Warren Buffett-owned Berkshire Hathaway reported a 14 percent increase in second quarter earnings, fueled by gains from derivatives trading, which soared to $1.53 billion from $453 million in the second quarter of last year. The firm earned $1,147 per share, while Wall Street analysts expected the company to earn $1,238 per share for the quarter.

Microsoft, which recently struck a ten-year deal with Yahoo (YHOO) to share search engine technology and ad revenue, announced an agreement with French ad company Publicis to sell its Razorfish digital advertising unit.

Meanwhile, McDonald's announced that its global comparable sales rose 4.3 percent in July, benefiting from a 7.2 percent jump in sales in Europe. U.S. sales rose 2.6 percent primarily due to new products, including McCafé espresso-based coffees, and the continued strength of McDonald's core menu.

The major averages have moved roughly sideways since moving lower after the opening bell, lingering in the red. The Dow is currently down 30.91 at 9,339.16, the Nasdaq is down 6.54 at 1,993.71 and the S&P 500 is down 4.00 at 1,006.48.

Sector News

Some of the day’s weakest performances are being shown by housing stocks, with the Philadelphia Housing Sector Index posting loss of 2.4 percent in mid-morning dealing. The index is backing off of a ten-month closing high reached on Friday.

The index is being led lower by shares of Ryland Group, which are down by 5 percent. With the decline, the stock is pulling back off a three month closing high set late last week.

Weakness is also visible among resource stocks, with gold and steel stocks dragging the sector lower. The NYSE Arca Gold Bugs Index and the NYSE Arca Steel Index are down by 2.6 percent and 2.2 percent, respectively. The indices are extending their recent choppy performance amid the recent volatility in commodity prices on the NYMEX.

Commercial real estate, wireless and transportation stocks are also retreating, while electronic storage stocks are bucking the downtrend. The NYSE Arca Disk Drive Index is up by 2.3 percent, reaching its best intraday level in over ten months.

Further, healthcare provider and banking stocks are also on the rise, although by much more modest margins, helping to limit the pullback in the boarder markets.

Stocks Driven By Analyst Comments

Shares of MPS Group are surging in mid-morning trading after being upgraded by Sun Trust to Buy from Neutral. The broker cited the pick up in job postings for the staffing firm as one of the reasons fro the ratings change. The stock has soared by 9 percent, reaching its best intraday price in over ten months earlier in the session.

Hewitt Associates is also gaining following an upgrade at UBS, which raised its rating on the stock from Neutral to Buy. The stock is currently up by 3.5 percent, and at its high for the session, Hewitt was at its best level in over nine months.

On the other hand, W&T Offshore is moving lower after BMO Capital Markets downgraded its rating on the company’s stock from Market Perform to Underperform. The broker cited the firm’s growth strategy and liquidity as a part of the reason for the downgrade. The stock has slipped by 4 percent but continues to hover near a seven week high.

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Bay Street Stocks May Give Back Some Of Recent Gains

Toronto stocks could see early weakness on Monday as traders collect profits on last week's gains. Markets in the U.S. and Europe are also seeing weakness.

Crude oil has dropped 59 cents to $70.34 per barrel in electronic trading. Gold is down $12.40 to $947.10, but copper is up nearly 2 cents to $2.805.

Northgate Minerals Corp. reported second quarter net earnings of US$5.4m or US$0.02 per share, compared to US$1.85m or US$0.01 per share last year.

Ensign Energy Services Inc. reported second quarter net income of C$13.21m or C$0.09 per share, compared to C$32.26m or C$0.21 per share last year.
 
Day4 Energy Inc. reported second quarter net loss of C$14.1m or C$0.38 per share, compared to net loss of C$2.5m or C$0.07 per share last year.

Sino-Forest Corp. reported second quarter net income of US$45.05m, compared to US$43.4m last year. Earnings per share were US$0.23, down from US$0.24 in the same quarter last year.

Cameco Corp. is making preparations to sell its 49% stake in Centerra Gold in a public stock sale the company hopes will raise more than C$600m, according to the Globe and Mail.

On Friday, the S&P/TSX Composite Index gained 91.96 points or 0.85% to finish at 10,885.33. The gain was the fifth in six sessions for the main index, which rose more than 175 points last week.

Crude oil futures are seeing some strength and are trading down $0.05 at $70.88 a barrel after closing the week ended August 7th modestly higher. Crude oil futures began the past week on a firm footing, rising over $2-a-barrel on Monday, aided by the equity market strength that drove traders away from the dollar. The commodity edged down on Tuesday amid some profit taking.

On Wednesday, oil rose moderately despite the weekly inventory report showing a build in crude oil stockpiles. Amid reports of a federal probe into abusive market practices of oil companies, oil saw significant volatility on Thursday before closing slightly lower. On Friday, oil prices declined despite the equity market rally, ending the week up $1.48 or 2.13% at $70.93.

Gold futures are moving down $4.50 at $955 an ounce after slipping by $1.50 or 0.16% to $959.50 an ounce in the previous week.

On the currency front, the U.S. dollar strengthened against the yen and the euro in the week ended August 7th. The dollar rose 3.1% against the yen to 97.57 yen and gained 0.5% against the euro to $1.4193.

The dollar, which has been trading lower in reaction to recovery hopes, received a boost from the positive employment report on Friday, with the greenback for once was not treated as a safe haven and was bid up on evidence pointing towards at least a modicum of strength in the economy.

Notwithstanding last week’s strength, the U.S. dollar is poised to see more weakness in the third quarter, given expectations for a strong rebound in performance in the third quarter. Additionally, the massive treasury purchases may exert downward pressure on the dollar. That said, currency analysts do not believe that the U.S. dollar will fall to the levels seen in 2008.

Currently, the dollar is trading at 97.17 yen and is valued at $1.4185 versus the euro.

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Indian Market Tumbles On Monsoon Worries

Despite strong Asian cues, the Indian market ended sharply lower on Monday on concerns a bad monsoon would disrupt a nascent revival in the domestic economy. Prime Minister Manmohan Singh on Saturday admitted for the first time that the weak southwest monsoon had an adverse impact on the kharif output, especially paddy, though he just stopped short of officially declaring a drought.

The BSE Sensex, which rose to a high of 15,417 in early trading, fell to the day's low of 14,902 before finishing at 15,010, down 150 points or 0.99% and the S&P CNX Nifty fell 44 points or 0.98% to 4,438.

On the BSE, the broad-based BSE 500 index declined 1.27%, the mid-cap index moved down 1.71% and the small-cap index shed 1.95%. The market breadth was extremely negative, as losers outnumbered gainers by 1801 to 849 , with 76 stocks closing unchanged.

Sectors that may be hurt by weak rains like auto, FMCG, consumer goods, and cement stocks bore the brunt of the selling pressure followed by capital goods, realty, public sector and banking stocks. On the other hand, IT stocks rose sharply after encouraging economic data underpinned hopes of a recovery in the world's largest economy.

Stock-wise, Mahindra & Mahindra(down 9.12%), ACC(down 6.52%), ITC(down 4.19%), Hero Honda Motors(down 3.80%), Hindustan Unilever(down 3.48%), Tata Motors(down 3.27%), Maruti Suzuki(down 3.09%), Grasim Industries(down 3.0%) and ICICI Bank(down 2.54%) led the decliners.
 
However, TCS surged up 6.02%, Wipro advanced 2.80%, Infosys rose 2.20%, Tata Power gained 2.12%, ONGC added 1.90%, Hindalco moved up 0.69% and Sterlite Industries edged up 0.50%.

Bharti Airtel fell 2.51% on worries the company will increase its offer to buy a stake in South Africa's MTN by 5-10 percent. Reliance Communications ended down 0.96% after reporting a 12% rise in its FY09 consolidated net profit.

Mundra Port and Special Economic Zone advanced 3.36% after it bagged a contract to develop a coal handling terminal at the port of Mormugao in Goa. Nucleus Software added 3.64% after it won a core banking order for their product FinnOne from Philippines- based Malayan Bank.

Cipla rose 3.17% on reports that it has the capability to supply 1.5 million dosages of Tamiflue vaccine used for treating the deadly swine flu pandemic within 4-6 weeks. Himalya International gained 2.85% after the Gujarat government allotted 22 hectares of land to the company for setting up a Rs.130-crore mega food processing plant in Mehsana.

NALCO gave off nearly 2% on reports about a delay in the implementation of its greenfield projects in overseas markets. Tantia Constructions fell 2.39% despite securing a Rs.6.99 crore contract for the construction of high level pre- stressed concrete bridge over River Tlawng in Mizoram.

Glenmark Pharmaceuticals rose 2.13% after a molecule called Crofelemer progressed to the final stage of phase III trials in the U.S. MVL was locked at the 5% upper circuit limit after the company proposed to split its existing equity shares.

On the BSE, ICICI Bank topped the traded value chart with a turnover of Rs 881.91 crore, followed by Reliance (Rs 796.26 crore), Bharti Airtel (Rs 729.81 crore), Tata Steel (Rs 714.45 crore) and Suzlon (Rs 685.87 crore).
 
Suzlon led the volume chart with trades of over 84 million shares, followed by Unitech (70.38 million), Mahindra Satyam (64.63 million), Ispat Industries (54.9 million) and First Source (46.63 million).

Elsewhere, while the other Asian markets except China, edged higher on Monday, with Japan rising above the 10,500 level for the first time in 10 months, European stocks fell in early trading, dragged down by banking and commodity stocks and U.S. index futures pointed towards a negative opening on Wall Street Monday morning ahead of the release of several key economic reports during the unfolding week.

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The major European markets are moving to the downside on Monday, with commodities and financial stocks bearing the brunt of the selling pressure. The major averages in the region opened lower and are seeing further losses, with the French CAC 40 Index receding 1.06%, the German DAX Index moving down 1.09% and the U.K.’s FTSE 100 Index declining 0.72%.

In major corporate news, insurers Resolution Plc and Friends Provident are engaged in merger talks once again with a revised proposal that calls for exchanging 0.9 new Resolution shares for each Friends Provident shares, valuing Friends Provident at 1.86 billion pounds.

Meanwhile, Germany’s Federal Statistical Office reported that German manufacturing turnover declined a working day adjusted 17.7% year-over-year in real terms in June compared to a 19% drop in May. On a monthly basis, the decline was 1.5% following a 4.4% drop in May.

Separately, survey results released by the Bank of France showed that the French business sentiment indicator for industries climbed to 87 in July from 84 in June, the fifth straight month of growth. The central bank said industrial activity remained stable in July following the decline in June. The capacity utilization rate remained at a level deemed low, comparable to that of previous months. Order books rose moderately thanks to stronger domestic demand, but remained well below acceptable levels.

A report released by the French Institute for Statistics and Economic Studies showed that industrial output rose 0.3% month-over-month in June compared with 2.8% growth in May. Economists had estimated a 0.2% drop in output. Manufacturing output rose 0.4%, slower than the 2.4% increase in the previous month.

U.S. Economic Reports

The unfolding week is a busy one on Main Street, with a few first tier reports along with the announcement of the FOMC decision due for the week. Among the economic reports, the Commerce Department's retail sales report for July, the Federal Reserve's industrial production report for July, the University of Michigan's preliminary reading of the consumer sentiment index for August and the weekly jobless claims report are likely to be closely watched by traders.

Also on tap are the Commerce Department's trade balance report for June, the Labor Department's import and export prices index for July, the Commerce Department's wholesale and business inventories reports for June, the preliminary second quarter productivity and costs report, the consumer price inflation report for July and the treasury budget for July. The results of the Treasury auctions of 3-year notes, 10-year notes and 30-year bonds scheduled for Tuesday, Wednesday and Thursday may also move the markets.

The Fed's interest rate decision is going to be a non-event, given the limited scope the Fed has at its disposal to rev up growth using its key policy rate. However, the focus will be on whether the central bank will expand its purchase program. Only last week, the Bank of England announced an increase in the size of its asset purchase program, suggesting that the U.K. economy is still in danger. Going by the Fed's recent preoccupation on exit strategies, Danske Bank believes that neither an increase in the size of the program nor an extension in the schedule of the program is likely.

The retail sales report for July is likely to reflect the positive impact of the cash-for-clunkers program. Subsequently, the headline number is expected to sport a decent look, although sales excluding autos are expected to show only a modest gain.

Meanwhile, the weekly jobless claims report is likely to show a drop in claims for another week, in-line with the recent declining trend. After seeing a severe downtrend for about 18 months now, industrial output declines should moderate going forward, as signaled by a rise in the ISM's manufacturing purchasing managers towards the '50' cut-off mark in July. Additionally, easy comparisons for auto production are likely to support production in July, lifting it into positive zone for the month.

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Microsoft is likely to react to the announcement that it has reached an agreement to sell its Razorfish digital advertising firm to France-based advertising company Publicis Group for $530 million in cash and stock.

Berkshire Hathaway could also be in the spotlight after it reported net earnings of $3.30 billion or $2,123 per share for its second quarter compared with $2.88 billion or $1,859 per share in the year-ago period. Operating earnings declined to $1,147 per share, missing the $1,238 per share consensus estimate. Revenues fell to $29.6 billion from $30.1 billion last year.

Smithfield Foods could see weakness after it announced that it has priced its offering of senior secured notes due July 2014. The company said the notes will have an interest rate of 10% per annum and will be issued at a price equal to 104% of their face value plus accrued interest from July 2, 2009.

Freddie Mac is expected to gain ground after it reported a second quarter loss of $374 million or 11 cents per share. Excluding the $1.1 billion in dividends paid to the government, the company earnings of $768 million compared to a loss of $9.9 billion last year. Revenues rose to $7.5 billion compared with $1.6 billion in the year-ago period. Citing $8.2 billion in positive networth, the company said it would not seek funding from the Treasury Department.

Triad Guaranty could be in focus after it reported a net loss of $359.4 million for its second quarter compared to a loss of $198.8 million in the year-ago period. On a per share basis, the company reported a loss of $23.91, wider than the loss of $3.68 per share last year. Total revenues rose slightly to $77.7 million from the year-ago’s $75.2 million.

Earnings

Quicksilver reported non-GAAP earnings of 24 cents per share compared to 40 cents per share in the year-ago period. Revenues rose to $206.04 million from $197.9 million in the same period last year. Analysts estimated earnings of 18 cents per share on revenues of $193.95 million.

Dish Network said its second quarter revenues eased 0.4% to $2.904 billion, almost in line with consensus estimate. The company’s basic earnings per share were 14 cents per share, significantly lower than 75 cents per share last year.

Dynegy reported a loss per share attributable to Dynegy of 41 cents per share for the second quarter, wider than 32 cents per share last year. Revenues climbed to $493 million from $322 million in the year-ago period. Separately, the company announced that it has entered a definitive agreement with LS Power as it strives to enhance its strategic and financial flexibility as well as transform its strategic and financial flexibility. The agreement provides for Dynegy to sell five peaking and three combined-cycle generation assets and its remaining interest in a project under construction in Texas for $1.025 billion in cash and $245 million of its Class B shares from LS power.

Priceline.com second quarter revenues rose 17.5% to $603.7 million. On an adjusted basis, the company reported earnings of $2.02 per share compared to $1.55 per share in the year-ago period. Analysts estimated earnings of $1.75 per share on revenues of $575.12 million. The company expects third quarter revenue growth of 19%-23% and pro forma net income of $2.70-$2.85 per share.

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