US & World Daily Markets Financial Briefing 10-11-2009

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Consolidation Likely After Yesterday’s Breathtaking Rally

The major U.S. index futures are pointing to a lower opening on Tuesday. Although no data that could alter the fundamental picture is scheduled to be released, sentiment is likely to remain subdued due to the solid gains posted in the previous session. Traders could use some of the negative earnings report and insipid guidance as reasons to take profits. That said, commodity prices are holding up and if the gains are sustained throughout the session, the commodity space may see some strength. Traders could also focus on the Fed speeches scheduled for the day.

U.S. stocks advanced strongly on Monday, with the Dow Industrials closing at a fresh high for the year, encouraged by the assurance that the stimulus measures are here to stay until the global economy convincingly steers clear of the recession. After opening modestly higher, the major averages climbed sharply in early trading and saw steady upside thereafter to close near the highs of the session.

The Dow Industrials climbed 203.52 points or 2.03% to end at 10,227, the S&P 500 Index rose 23.78 points or 2.22% to 1,093 and the Nasdaq Composite closed at 2,154, up 41.62 points or 1.97%.

Twenty-nine of the thirty Dow components ended the session higher, with Kraft Foods (KFT) the lone decliner, falling 0.93% after it launched a formal hostile offer for U.K. confectioner Cadbury (CBY). Alcoa (AA) (up 3.49%), American Express (AXP) (up 4.94%), Boeing (BA) (up 3.36%), Bank of America (BAC) (up 4.78%), Caterpillar (CAT) (up 4.17%), DuPont (DD) (up 3.68%), General Electric (GE) (up 3.39%) and Travelers Co. (TRV) (up 3.28%) were among the notable gainers.

Among the sector indexes, the NYSE Arca Airline Index rose 2.10%, the Dow Jones U.S. Basic Materials Average climbed 3.49%, the NYSE Arca Securities Broker/Dealer Index ended up 2.68% and the KBW Bank Index rallied 3.55%. While the S&P Retail Index gained close to 2%, the Philadelphia Housing Sector Index rose 2.37%. The Philadelphia Oil Service Index advanced 3.34% and the NYSE Arca Gold Bugs Index rose 3.97%.

In the technology space, the Philadelphia Semiconductor Index moved up 3.15%, the NYSE Arca Disk Drive Index gained 3.62% and the NYSE Arca Software Index rose 2.14%.

Little Holiday Sales Cheer?

An unemployment rate that rose to a 26-year high in October, does not bode well for the holiday selling season. However, it is encouraging to note that consumer spending has picked up in the third quarter from its very weak performances since the first quarter of 2008. The advance third quarter GDP report showed that personal consumption spending rose at an annualized pace of 3.5% from the previous quarter. This follows a 0.7% decline in the second quarter, a 6.4% decline in the first quarter and a 5.4% drop in the fourth quarter of 2008.

Apart from the 22.3% jump in the spending on durable goods, which mostly reflected spending stimulated by the cash-for-clunkers program, spending on non-durable goods and services rose 3.4% and 1.2%, respectively. Although one can contend that the underlying spending growth is still modest, there is no denying of the fact that consumers are opening up. What more telling evidence can one have than the auto sales for October, which rose at a seasonally adjusted annual rate of 13% in October even after consumers were weaned off the ‘CARS’ program.

A survey done by the National Retail Federation on consumer intentions showed that two-thirds of the people surveyed said the economy would affect their holiday plans this year. The survey also revealed that a majority plans to shop at discount stores. Meanwhile, many retailers are scaling back on inventory levels to prevent unplanned markdowns at the end of the season. Estimates released by NRF in early October called for $437.6 billion in holiday sales in 2009, down 1% from last year, although not as steep as the 3.4% drop seen in 2008.

At the same time, a separate survey carried out by the International Council of Shopping Centers and Goldman Sachs found that consumers plan to spend about $543 on gifts and $133 on gift cards this holiday season. The ICSC also reported separately that chain store sales in the U.S. rose 2.1% year-over-year in October, marking the strongest gain since July 2008, when sales were up 2.3%. The gains were led by discount, drug and wholesale stores.

Although sales aren’t likely to stage a strong rebound, it is unlikely that things are as bad as in the previous year. Consumers are apparently seeing some support from the stock market performance, with the averages in the U.S. as well as globally hitting their highest levels of the year. That said, for the gains on the consumer front to become sustainable, we may have to see a reversal in the abysmal situation in the job market.

Bay Street Stocks Look To Build On Recent Gains

Canadian stocks will look to continue a recent rally on Tuesday morning after rising to a two-week high in yesterday's trading. Oil and gold prices are slightly higher in early NYMEX trading and traders are pondering the latest in earnings news.

Light sweet crude is up 35 cents to $78.78 per barrel and gold is up $2.60 to $1,104.00. Copper has slipped 1.05 cents to $2.957.

Rona Inc. reported that third quarter net income was C$49.1 million, or C$0.38 per share, compared to C$52.5 million or C$0.45 per share in 2008.

Crew Energy Inc. reported a third-quarter net loss and comprehensive loss of C$7.376 million compared to profit of C$15.178 million a year ago. Loss per share was C$0.09 compared to profit of C$0.23 per share prior year.
 
ATS Automation Tooling Systems reported second-quarter net income slipped to C$6.01 million or C$0.07 per share from C$9.27 million or C$0.12 per share in the year earlier quarter.

European Goldfields reported its net loss for the third-quarter was US$3.12 million or US$0.02 per share, compared to a net loss of US$5.04 million or US$0.03 per share. Sales for the quarter were US$17.04 million, up from US$16.10 million in the year ago quarter.

Silver Wheaton reported higher quarterly net profit of US$33.56 million or US$0.11 per share compared with US$20.24 million or US$0.08 per share in 2008. Analysts anticipated earnings of US$0.11 per share.

On Monday, the S&P/TSX Composite Index rose 236.46 points or 2.1% to finish at 11,486.88. The market rose more than 300 points last week.

Currency, Commodity Futures

Crude oil futures are moving up $0.34 to $79.77 a barrel after jumping $2 to $79.43 a barrel in Monday’s session.

Gold futures are trading up $2.90 to $1,104.30 an ounce. In the previous session, the precious metal rose $5.70 to $1,101.40 an ounce. Gold’s run up was due to weakness in the value of the dollar, which fell in response to comments by G20 finance ministers over the weekend, and the Sri Lankan central bank’s announcement that it purchased gold recently and intends to diversify its reserve through additional gold purchases. Although Sri Lanka’s reserves are not big enough to give any meaningful thrust to gold prices, it generated positive sentiment, which pushed up gold prices.

Among currencies, the U.S. dollar is trading at 89.80 yen compared to the 89.9245 yen it fetched at the close of New York trading on Monday. Against the euro, the greenback is currently valued at $1.4971 compared to yesterday’s close of $1.4999.

The dollar is likely to see a sustainable recovery only when it becomes certain that the Fed will exit its near zero interest policy.

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Asian Markets Extend Gains On Wall Street Cues

Major markets in Asia, excluding India and Indonesia, ended in positive territory for the second successive day on Tuesday taking cues from Wall Street where the major averages ended sharply higher on increasing optimism about sustaining recovery and return of risk appetite. However, the markets ended off the highs as profit taking in late session limited the gains. The markets in India and Indonesia ended in negative territory on profit taking.

In Japan, the benchmark Nikkei 225 Index ended in positive territory with a gain of 61.74 points, or 0.6%, at 9871, and the broader Topix index of all First Section issues rose 1.77 points, or 0.2%, to 872.

On the economic front, the Ministry of Finance revealed that the country posted a current account surplus of 1.568 trillion yen in September, up 0.2% year-over-year. Analysts expected a current account surplus of 1.51 trillion yen for the month.

In a separate release, the Bank of Japan stated that overall bank lending rose 1.5% year-over-year in October, in line with analysts expectations. The report further noted that, excluding trusts, bank lending also rose 1.5% during October after the revised 1.6% increase in the previous month. Adjusted lending showed a 1.9% annual increase following the 2.3% gain a month earlier.

Banking stocks led the gains after Shizuka Kamei, Financial Services Minister, said that the Government is willing to tolerate, for a brief period, a drop in capital ratios of major domestic banks in order to ensure supply of adequate credit. Mitsubishi UFJ Financial gained 2.65%, Sumitomo Mitsui Financial surged up 3.59%, Resona Holdings edged up 0.10% and Mizuho Financial rose 1.12%.
 
Brokerage stocks also ended in positive territory, mostly due to short-covering. Nomura Holdings climbed 2.90%, Daiwa Securities added 0.88%, Matsui Securities advanced 0.81% and Mizuho Securities edged up 0.32%.

Trading companies also ended higher. Toyota Tsusho Corp advanced 2.37%, Itochu Corp. climbed 3.44%, Mitsui & Co. added 1.28%, Marubeni Corp gained 2.63% and Mitsubishi Corp. edged up 0.30%.

Mixed trading was witnessed among automotive stocks. Suzuki Motor gained 1.56%, Honda Motor added 0.71%, Nissan Motor advanced 1.71% and Hino Motors rose 0.91%. However, Toyota Motor lost 2.57%, Isuzu Motors slumped 4.15% and Mazda Motor slipped 0.47%.

Exporters also ended mixed. Canon gained 0.89%; Sony Corp gave up the early gains and remained unchanged from previous close, while Sharp Corp. shed 0.72%.

In Australia, the benchmark S&P/ASX200 Index rose 58.70 points, or 1.26% to close at 4,734, while the All-Ordinaries Index ended at 4,744, representing a gain of 57.50 points, or 1.23%.

On the economic front, a report released by the National Australia Bank revealed that the index measuring business confidence rose in October following a decline in the previous month. As per the report, the index measuring business confidence stood at 16 in October, up 2 points from September's reading of 14. Among the sub-indices, the index measuring business conditions rose sharply by 9 points to 12, the profit index climbed 9 points to 13 and the sales index gained 7 points to 15.

Light sweet crude oil futures for December delivery ended at $78.91 a barrel in electronic trading, down $0.52 per barrel from previous close at $79.43 a barrel in New York on Monday.

Banking stocks led the gains on increasing optimism about recovery. ANZ Bank, which revealed plans to offer convertible preference shares to raise $750 million in tier one capital, added 0.62%. Commonwealth Bank of Australia advanced 0.85%, National Australia Bank gained 1.79% and Westpac Banking rose 0.46%. Investment banking entity Macquarie Group climbed 1.00%.

Metals and mining stocks ended in positive territory following rise in commodity prices. BHP Billiton gained 2.34%, Rio Tinto rose 2.59%, Fortescue Metals surged up 3.33%, Gindalbie Metals added 0.55%, Iluka Resources climbed 2.92% and Oz Minerals increased 2.47%.
 
Oil stocks also advanced. Woodside Petroleum rose 1.65%, Santos advanced 1.24%, Oil Search added 0.50% and Origin Energy climbed 1.49%.

Mixed trading was witnessed among gold stocks after the price of bullion surpassed $1,100 in the bullion market. Sino Gold Mining soared 6.53% while Newcrest Mining slipped 0.42% and Lihir Gold shed 0.88% on profit taking.

Property stocks ended in positive territory. GPT Group advanced 1.65%, Mirvac Group surged up 4.26% and Stockland climbed 3.80%. However, Westfield Group bucked the trend and ended in negative territory with a loss of 1.38%.

Retail stocks also ended mixed. David Jones advanced 1.76%, Wesfarmers climbed 2.77% and Woolworths edged up 0.11%. However, Harvey Norman lost 1.87% and JB Hi-Fi shed 1.61% on profit taking.

In Hong Kong, the Hang Seng Index ended in positive territory with a gain of 60.61 points, or 0.27% at 22,268, taking cues from Wall Street as well as gains in mainland China. Thought the market ended at a 2-week high, profit taking at higher levels limited the gains.

Property related stocks dragged the index lower as investors were concerned about higher valuation levels. Among the property stocks, Swire Pacific shed 2.90% and SHK property lost 1.95%. Among insurance firms, FIH was a major loser having declined 4.24%. Telecom stocks ended higher with Tencent gaining 3.10%.

In South Korea, the KOSPI Index ended in the green with a marginal gain of 5.51 points, or 0.35% to 1,582, taking cues from Wall Street where the major indices rose sharply on optimism about sustaining recovery and risk appetite returns back. Reports of a naval clash between the two Koreas off the west coast had little or no impact on the market as geopolitical risks have already been factored in by the market participants. Financial stocks led the gains on Wall street gains while shipbuilders ended in the red on profit taking.

The Indian market ended a volatile session modestly lower, as investors took some profits following recent gains. A mixed trend in the European markets and lower U.S stock index futures also weighed on the market. Realty and IT stocks dragged the market lower, while banking and metal stocks helped cut some of the losses. The BSE Sensex ended at 16,441, down 58 points or 0.35% from its previous close, and the S&P CNX Nifty fell 17 points or 0.34% to 4,882.

Among the other major markets in the region, China's Shanghai Composite Index edged up 3.02 points, or 0.10% to 3,179, Singapore's Strait Times Index added 14.22 points, or 0.53% to close at 2,708 and Taiwan's Weighted Index advanced 56.79 points, or 0.75%, to close at 7,593. However, Indonesia's Jakarta Composite Index bucked the trend and ended weaker with a loss 24.48 points, or 1.02% at 2,382.

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The major European markets are showing a lack of direction on Tuesday after posting decent gains in the previous session. Currently, the French CAC Index is moving down 0.02%, while the U.K.’s FTSE 100 Index and the German DAX Index are advancing 0.07% and 0.08%, respectively.

In corporate news, Barclays (BCS) reported that its third quarter profit declined 54% year-over-year to 1.07 billion pounds. However, total revenues rose to 7.53 billion pounds from 6.98 billion pounds last year.

On the economic front, the German Federal Statistical Office reported that Germany’s consumer prices remained unchanged in October compared to a 0.3% drop in the previous month. On a monthly basis, consumer prices edged up 0.1% in October following the 0.4% decline in September.

Meanwhile, a separate report released by the agency showed that manufacturing turnover fell 13.6% in real terms in September, smaller than the 17.3% drop in the previous month.

The Centre for European Economic Research said the economic sentiment index for Germany fell to 51.1 in November from 56 in October. Economists had forecast a more modest decline in the index to 55. At the same time, the current situation index improved to minus 65.6 from October's minus 72.2.

French statistical office, the INSEE reported that French industrial output fell 1.6% month-over-month in September compared to the 3% increase in August. Economists estimated 0.5% growth.

Meanwhile, U.K.’s trade balance released by the U.K. Office of National Statistics showed that the nation’s trade deficit rose to 7.2 billion pounds in September compared to the deficit of 6.1 billion pounds in September. Exports rose at a slower rate of 3.9% compared to a 7.5% increase in imports.

U.S. Economic News

Atlanta Federal Reserve Bank President Dennis Lockhart is due to speak on the economy to the Urban Land Institute conference in Atlanta at 9:15 AM ET. San Francisco Federal Reserve Bank Janet Yellen is scheduled to speak on the economic outlook and real estate to Lambda Alpha International in Phoenix at 10 AM ET. Additionally, Dallas Federal Reserve Bank President Richard Fisher will speak on the economic outlook to the Austin Headliners Club in Austin at 7:30 PM ET.

Earnings

Beazer Homes (BZH) reported a fourth quarter profit of 84 cents per share compared to a loss of $12.29 per share last year. Earnings from continuing operations were 87 cents per share, which included a pre-tax gain of $89.3 million. Revenues declined 42% to $376.3 million, above the $338.3 million consensus estimate.

Hewitt Associates (HEW) said its fourth quarter reported net revenues fell 6% to $757.7 million. Net revenues were down a more modest 4%. The company’s underlying net income was 49 cents per share. Analysts estimated earnings of 63 cents per share on revenues of $754 million. For 2010, the company expects adjusted earnings of $2.85-$2.95 per share and revenue growth in the low to mid-single digits. The consensus estimates call for earnings of $2.85 per share on revenues of $3.03 billion.

Tyco International’s (TYC) fourth quarter adjusted earnings from continuing operations were 61 cents per share. Revenues declined 16% year-over-year to $4.42 billion. Analysts estimated earnings of 54 cents per share on revenues of $4.32 billion.

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Electronic Arts (ERTS) may be in focus after it reported a loss of $1.21 per share for its second quarter, wider than the 97 cents per share loss reported in the year-ago period. The company’s adjusted earnings were 6 cents per share, lower than the 7 cents per share profit estimated by analysts. Revenues rose 2% on an adjusted basis to $1.15 billion. The company expects to report an adjusted full year profit of 70 cents-$1 per share on adjusted revenues of $4.2 billion to $4.4 billion. The consensus estimates call for earnings of 89 cents per share on revenues of $4.26 billion. The company also announced a deal to buy Playfish, Inc., a social online games company, for $275 million.

Priceline.com (PCLN) is likely to see buying interest after it reported third quarter earnings adjusted earnings of $3.45 per share, as revenues surged up 30% to $730.7 million. Analysts estimated earnings of $2.92 per share on revenues of $694 million. The company expects fourth quarter adjusted earnings of $1.52-$1.62 per share compared to the $1.49 per share consensus estimate.

Live Nation (LYV) could see activity after it said its third quarter revenues rose to $1.81 billion from $1.59 billion last year. Net income attributable to the company fell to 78 cents per share from $1.66 per share in the year-ago period. Analysts expected earnings of 80 cents per share on revenues of $1.62 billion.

MBI (MBIA) is likely to react to its announcement that it posted a loss of $3.50 per share for its third quarter compared to a loss of $3.42 per share in the year-ago period. The recent quarter’s results included $810.2 million in pre-tax unrealized loss on insured credit derivatives and $238.8 million in pre-tax loss and loss adjustment expenses

Fluor (FLR) could see weakness after it guided its 2010 earnings to $3.20-$3.60 per share compared to the consensus estimate of $3.58 per share. The company reported third quarter earnings of 89 cents per share, lower than $1 per share in the year-ago period. Revenues fell 4% to $5.42 billion. Analysts estimated earnings of 90 cents per share on revenues of $5.49 billion.

Hologic (HOLX) declined in Monday’s after hours session after it forecast 2010 revenues of $1.625 billion to $1.650 billion and non-GAAP earnings of $1.15-$1.19 per share. Analysts estimate earnings of $1.24 per share on revenues of $1.69 billion. The company reported fourth quarter revenues of $402.8 million, down 8% year-over-year, exceeding the $398.27 million mean analysts’ estimate. The company’s non-GAAP earnings were 28 cents per share, ahead of the consensus estimate of 27 cents per share.

Ryland (RYL) may see some activity after it announcing that it plans to book a tax benefit in its fourth quarter and anticipates receiving a federal income tax cash refund of about $80 million to $120 million. The decision is to take advantage of the Worker, Homeownership, and Business Assistance Act of 2009, which was signed into law by President Obama and which allows carrying back of anticipated operating loss to previously profitable years.

Duke Realty (DRE) is expected to be in focus after it announced the resignation of its COO Robert Chapman, who is due to leave the company after a transition period through year end 2009. The company said Chapman had decided to leave after considering the effect of the current economic condition and an anticipated reduction in the development of new properties.

Lumber Liquidators (LL) could gain ground after Standard & Poor’s announced that it would replace UCBH Holdings in the S&P SmallCap 600 Index. The main subsidiary of UCBH has been placed into FDIC receivership.

Ciena (CIEN) is likely to see activity after it said it has received regulatory clearances in the U.S. and Canada for its proposed acquisition of substantially all of Nortel’s optical networking and carrier Ethernet assets. The proposed acquisition now has to be approved by the U.S. Insolvency Court for the District of Delaware and the Ontario Court of Justice.

Oracle (ORCL) could see some activity after EU regulators determined that the company’s impending acquisition of Sun Microsystems (JAVA) may violate some anti-trust rules. In response, Oracle stated that the commission’s objections reveal a profound misunderstanding of both database competition and open-source dynamics.

Union Pacific (UNP) and Norfolk Southern (NSC) are likely to see some weakness after Burlington Northern Santa Fe (BNI) CEO Matt Rose said in a conference call that Warren Buffett’s Berkshire Hathaway (BRKA) will sell its stake in Union Pacific and Norfolk Southern.

McDermott (MDR) could be in focus after it reported that its third quarter net income rose to 50 cents per share from 37 cents per share last year. Revenues were almost flat at $1.68 billion, exceeding the consensus estimate of $1.53 billion.

GeoEye (GEOY) may gain ground after it reported that its third quarter revenues rose 123% to $35.8 million. The company reported earnings of 61 cents per share compared to $1.57 per share in the year-ago period, which included a tax benefit of $1.38 per share. Analysts estimated earnings of 44 cents per share on revenues of $78.81 million. For 2009, the company expects revenues of $275 million to $280 million and adjusted earnings of $1.30-$1.45 per share. The consensus estimates call for earnings of $1.25 per share on revenues of $275.32 million.

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